When picking and choosing dividend stocks, it's essential you look past what the company has done in previous years and get an appreciation of what it's likely to do in the future.
Of course, understanding the past plays a big part in forecasting future dividend payments. However if the company you're thinking of buying isn't growing, or if there are direct or indirect industry headwinds then dividends will come under threat.
If a company isn't making any cash, it won't pay a dividend for long!
That's why analysts will always say "cash is king" because if a growing company has strong profit margins, it can reinvest in growth areas while still paying out strong dividends.
Let's take a look at who might be the better dividend payer, out of National Australia Bank Ltd (ASX: NAB) and Telstra Corporation Ltd (ASX: TLS).
NAB is our biggest bank by assets and boasts a dividend yield of 5.9% fully franked. However, its exposure to the UK economy isn't helpful and a rise in domestic bad debts could hit cash profits. Then there's APRA's mandatory tier-1 capital adequacy ratio, which could hinder all of the Big Four banks' ability to pay larger dividends.
However unlike NAB, Telstra Corporation Ltd (ASX: TLS) has huge profit margins and finds itself in a nicely growing industry (therefore earnings and cash flow will likely grow over time). It currently yields 5.5% fully franked – which is less than NAB – but given its competitive advantages and enviable margins, its dividend will likely be more reliable in the years ahead.
So should you buy Telstra now?
Telstra currently has the lowest dividend yield it's had for any of the past 10 years. Therefore, given its lofty valuation, I suggest investors adopt a wait-and-see approach with Telstra.
