While the Australian share market is home to a great number of high-yielding dividend shares, not all of them are worth investing in today.
Before making an investment in a dividend share I believe there are a number of checks which investors should do in order to avoid a dud. Here they are:
Is the dividend sustainable?
There's nothing worse than a dividend being cut or stopped altogether. At the moment there are questions around the sustainability of the big four banks' dividends.
With the bank levy expected to impact Australia and New Zealand Banking Group (ASX: ANZ) by approximately $240 million after tax per annum, it seems inevitable that the bank will be forced to cut its dividend.
Especially considering last year the bank paid out 83% of its earnings as dividends. A payout ratio at that level leaves very little room for manoeuvre when surprises happen.
Can the payout ratio increase?
I think the Collins Foods Ltd (ASX: CKF) dividend is a great example of one with room to grow. At present its shares provide a trailing fully franked 3.1% dividend.
Unlike ANZ, Collins Food paid out just 40% of its earnings as dividends last year. This is a much lower payout ratio compared to rival Domino's Pizza Enterprises Ltd. (ASX: DMP), which traditionally pays out 70% of its earnings.
In time I expect Collins Food will be in a position to increase its payout ratio in line with Domino's.
Will its dividend increase in the future?
Finally, whilst I think that the Telstra Corporation Ltd (ASX: TLS) dividend is a great one to have in your portfolio, I don't expect to see much by way of increases to it in the next decade.
Whereas a company like Mantra Group Ltd (ASX: MTR) has the tailwinds of the tourism boom in its sails. I expect this to result in bumper earnings growth which could allow the accommodation provider to increases its dividend each year for the foreseeable future.
At present Mantra's shares provide a trailing fully franked 3.6% dividend.
Foolish takeaway
Of the many dividend shares mentioned above, the ones which tick all three boxes for me are Collins Food and Mantra Group.
