When I last wrote about investing for income I recommended shares of companies whose well-covered yields seem sustainable. The focus should be on those of large groups with low levels of debt, strong competitive positions and good international diversification, in sectors where demand is not likely to fall sharply, or indeed may continue to grow, such as energy, pharmaceuticals, tobacco, healthcare and many other services industries.
The Investors Chronicle recently advised: "If times get tough… the relative degree of safety in these circumstances is a trade-off between the absolute size of the yield, dividend cover, balance sheet strength, cash flow and the susceptibility of the company to further adversity."
When choosing a share primarily for the income it will provide, the first filter you need to apply is the current rate of dividend.
Choosing stocks with very high yields is not a good idea. They may be signalling that the shares are very cheap because the markets expect the companies, usually operating in tough sectors such as banking, construction or technology, expect them to cut or suspend their dividends and are unlikely to rebound soon.
Research by Andrew Lapthorne of Societé Generale suggests you should look to a dividend yield that is above-average, but not too much so - say 100 to 120 per cent of average, excluding the often-distressed very-high-yielders.
You also need to consider recent-years' history of growth in dividend, but also the degree to which it is covered by earnings, reviewing underlying profits and cashflow growth over time, volatility in the trends, gearing (level of debt) and share-price performance -- what the markets have been saying about their confidence in the company.
Graham reckoned that you should require a cover - earnings relative to dividends - of at least 1½ times.
To reduce risk it's best to avoid companies burdened with debt. One commonly-used rule of thumb is to exclude any with a gearing (debt to equity ratio) greater than 50 per cent.
David Fuller's view This is sound advice. In the current environment of slowing global GDP growth, not to mention the risk of recession in the west, and with most stock markets down on the year to date, an increasing number of shares offer seemingly attractive dividends. Unfortunately, some of them will not be able to maintain their current payouts.
Many companies will experience an earnings downturn in difficult economic circumstances but those operating primarily in a weak economy or region are usually more vulnerable than leading multinational companies leveraged to global GDP growth.
Martin Spring provides a list of "Low-Risk Income-Yielders to Consider" in this issue and you can find price charts for these shares in the Fullermoney Chart Library.