Few buyers prefer it when an organization cuts its dividend. However it’s all the time a threat for any revenue share. However whereas FTSE 100 dividend cuts could generate headlines, some FTSE 250 shares slash their payouts with out attracting the identical form of consideration.

But a lower is a lower – and will be painful relating to the passive revenue streams one earns from a portfolio.

That explains why I diversify my portfolio throughout a variety of various shares. However as an investor, it’s also essential to know among the doable indicators {that a} dividend lower may be coming.

Unusually excessive yield

Take a look at this chart. Can we discover something uncommon?

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It reveals a dividend yield that stood at round 12% three years in the past. However that then elevated to virtually 20%. In different phrases, for each pound I invested on this share, I might have gotten again 20p per 12 months – if the dividend was maintained at that stage.

Some shares have excessive yields and keep or enhance their payouts. However an unusually excessive yield – and 20% is certainly that for a FTSE 250 share – is a pink flag for me. I might wish to know why the yield was so excessive and decide what the long run appeared like for the dividend.

Generally a yield is excessive as a result of a enterprise had a very good 12 months.

In different instances, it displays the share price transferring down as investor nervousness grows in regards to the sustainability of a dividend.

That’s precisely the case right here. The yield chart above pertains to Diversified Power (LSE: DEC). The FTSE 250 share has fallen 62% in 5 years.

Rising debt

Diversified Power introduced a dividend lower in March, which didn’t shock me in any respect. Partly that lack of shock was due to the corporate’s stability sheet – one thing else I pay shut consideration to as an investor.

At $1.3bn, it had barely much less internet debt on the finish of final 12 months than 12 months earlier than.

Created utilizing TradingView

Nonetheless, for an organization that has a market capitalisation of round £440m (roughly $527m) in the mean time, that’s an uncomfortably excessive debt in my view.

Debt issues relating to dividends as a result of the upper an organization’s debt, the much less monetary flexibility an organization sometimes has. Even when it generates massive money flows, it might want to make use of them to service debt, to not pay huge dividends.

That’s true of a FTSE 100 agency too — however a FTSE 250 firm can discover accessing finance extra expensive than a far bigger firm in the primary index.

On the lookout for nice corporations not simply excessive dividends

There are a bunch of different indicators I have a look at when contemplating what may occur to a share’s dividends in future. These are solely two of them.

Briefly, as a substitute of specializing in yield, I ask myself what an organization’s long-term industrial prospects appear like and what which may imply for shareholder payouts.