over 1 year ago • 1 min
Higher rates push investors to be extra scrutinous about where companies splash the cash. After all, how a business spends money during different economic climates can be a telling indicator of everything from the health of its balance sheet to its dividend budget.
Investors generally don’t want to see companies spending on expensive long-term investments when a recession looms. They’d rather see a firm saving up cash to pad out its balance sheet instead, even though a recessionary period would make investing considerably cheaper.
Investors do want to see companies reward shareholders with dividends and buybacks during times of slow growth, according to data collected over the last two decades – just check out the dark blue line in the chart. To check whether a company can sustainably maintain or grow its dividend payouts, look for firms that can produce strong cash flows and balance sheets – and be wary of those that have historically cut dividends in bad times or are currently funding them from their balance sheets. Keep an eye out for companies with a relatively high “cash conversion ratio”: this is the proportion of its EBITDA – that’s earnings before deducting interest, tax, and depreciation – that it converts into operating cash flow. And instead of simply looking for stocks with high dividend yields, look for those that can sustain them: the VanEck Morningstar Developed Markets Dividend Leaders UCITS ETF (ticker: TDGB, expense ratio: 0.38%) could be a good starting point.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.