Source: studypoints.blogspot.com
When looking at stocks with the aim of income as supposed to growth who offer more downside protection than growth stocks, there are certain characteristics that companies hold which gives an indication that they are more concerned with paying out dividends to their shareholders, rather than keeping the dividend as retained earnings and investing them in growth, jobs and taxes for the economy.
Certain sectors will pay out more dividends than others and this depends of the volatility of their cash flows over the financial year and their operational gearing: if cash flows are volatile then it is less likely that they will pay a dividend and keep the cash to weather out the bad days, these are companies such as mining companies and transport manufacturers.
The Pay Out Ratio
However, there are signs which you need to look out for when companies are promising big dividends and a key metric to look out for is the pay-out ratio. This is the ratio that compares the proportion of net income as retained earnings to the dividends that are paid to stockholders. If this is an excessive figure (I.e. over 100%, where there is a large chance that dividends will be cut) then there is the possibility that the company will have insufficient retained earnings in the future to continue growing and is a reflection of the directors dividend policy.
The pay out ratio should be a leader of the industry or sector, but should be modest and have room for future growth, very few things damage shareholder loyalty more than a volatile divided pay-out.
Cash flows
Looking at the companies cash flows are an essential element of choosing stocks to invest, Companies can operate without cash for a short amount of time, that is, until the bills come rolling in. A steadily growing net cash flow figure is a characteristic in more mature companies where there is little room for growth and therefore investment and is an indicator that the company can manage its cash flows effectively and therefore of less risk to an investor who is looking at receiving steadily growing income from dividends over the long term
A newer start-up company will tend to have negative or declining cash flows as heavy investment (such as the purchase in property, plant and machinery, or significant investment in working capital) tends to be the priority and is very unlikely they will pay put dividends. Small Cap investors can choose funds whose speciality is investing in start-up business through Venture Capital Trusts or Enterprise investment Schemes where tax breaks are available here, but is outside of the scope of this article.
If there is more cash going out than coming in, then there is a very big chance that dividends will be cut or eliminated altogether and send investors to dump the stock and invest elsewhere.
The Bottom Line
If you are looking for income over growth, then your relationship manager will be able to pick out the best stocks which offer the highest dividends yield and pay-out ratios and will apportion your stocks for your portfolio to ensure that your portfolio as a whole will have the best dividend yield possible.
Disclaimer: any mentions of tax breaks only apply to the UK tax system, whereas Europe and the US will have differing tax systems and laws.
Contact the Writer of this Article:
Todd Gilbey | gilbey.todd@googlemail.com
Todd Gilbey 
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