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Published on March 19, 2008

With good dividend-paying stocks, investors have a chance for the double reward of dividend income and stock-price growth.

However, it is not enough simply to select the highest-dividend-paying companies, because payment of a high dividend does not guarantee that either a firm is really in a position to make such a payment or it will continue to do so in the future. The best way to pick dividend payers is to check the financial health of companies, particularly to see whether there is enough cash in hand to cover dividend payments.

Do not be panicked into believing you need the expertise of a financial analyst to examine the financial statements of listed companies. Make it simple by first checking out the debt-to-equity (D/E) and current ratios.

The current ratio indicates whether a firm has enough resources to pay its debts. It comes from dividing current assets by current liabilities. The D/E ratio, showing a company's financial leverage, is total liabilities divided by shareholders' equity.

If a company has high D/E and current ratios, it means it is saddled with relatively high debts, and dividend payments may not be forthcoming in a year's time.

Another important figure is the pay-out ratio. If a company announces its pay-out ratio is greater than 100 per cent, it is likely the firm is using debts or selling assets to pay a dividend, and alarms should ring about holding that stock any longer. A suitable pay-out ratio is 30-70 per cent, as this indicates the capacity for not only a reasonable dividend for shareholders, but also funding business expansion, which will create both share-price growth and dividends in the future.

In the case of a company borrowing to pay a dividend, investors should consider the reasons.  For instance, Ticon Industrial Connection announced it would issue debentures to finance the payment of an annual dividend totalling Bt800 million. The company explained it had chosen to borrow rather than use its net profit to pay the dividend because its cash flow, if invested should generate a return of 15-20 per cent, while its debentures would cost only 4 per cent. This action created a win-win situation, because shareholders received a dividend, while the company had funding for business expansion.

Last but not least, investors should take companies' business prospects into consideration. Avoid putting money into companies that, although they pay high dividends, have a grim outlook. It is possible that in these cases, dividends will soon dry up.

Oranan Paweewun

The Nation