Dividend payments have gone the way of the Celtic Tiger and they may not be back any time soon, writes CAROLINE MADDEN

IN THE past, some Irish investors followed a simple but often effective stock-picking strategy known as income investing. Rather than chasing capital gains, they selected Irish stocks likely to provide them with a steady income stream in the form of solid dividends.

However, with many companies now scrapping their dividend payments, does income investing still stack up in an Irish context?

Vincent Digby, financial adviser with www.impartial.ie and former trader, says this strategy might not be successful in the medium-term because of the concentration of financial and constructions stocks in the Irish market.

Until recently, well-established blue-chip companies such as banks could be relied upon to have strong dividend policies. All Irish banks though have now cancelled their dividends to shore up capital in anticipation of higher loan losses. Analysts believe that this situation will continue for years to come.

“There was, at the early stages of the financial crisis, the simplistic view on the bank stocks, saying they were yielding 10 or 11 per cent,” Digby notes.

One of the most important measurements from the perspective of dividend investors is dividend yield. This is the ratio of the dividend paid by a company in a year relative to its share price, and indicates the rate of return on investment.

The severe fall in the price of banking stocks last year pushed up their dividend yield to very high levels.

However Digby points out that these high yields were based on the assumption that the banks would continue paying dividends at the forecasted rate, which has not proved to be the case.

“Given the situation with the rebuilding of capital now and impaired loans to be worked through the system . . . it’s hard to see an immediate return to a strong dividend policy,” he says.

Anna Lalor, banking analyst at Goodbody Stockbrokers, agrees: “While the Government’s involved [with the banks] – and until the credit cycle is finished – it’s hard to see that they will be paying any dividend.”

Under the terms of the recently announced bank recapitalisation scheme, the Government is taking preference shares in AIB and Bank of Ireland in return for a €7 billion injection of capital.

As the owner of preference shares, the Government will be paid dividends ahead of ordinary investors.

According to Lalor, a lot of investors would have been attracted to the banks in the past because they paid a “good dividend stream all the time and they had regular enough earnings”.

“But obviously that situation has changed quite dramatically. A lot of companies have had to curtail dividends. From a cashflow point of view, if you think about how hard it is for companies to access funding, they’re going to try and conserve cash wherever they can, and if they have debt they want to try and pay some of that down,” Lalor says.

Last month Independent News and Media announced that in order to maximise cash flow and reduce leverage, it would not be paying a final dividend for 2008.

The final dividend paid for 2007 was €60.2 million.

After paying an interim dividend of 16.05 cent per share in October, packaging company Smurfit Kappa has also suspended dividend payments in 2009 in order to maximise the cash available to reduce its debt. The company also says it will re-evaluate its future dividend policy in light of “prevailing market conditions” .

So will any Irish companies be in a position to pay dividends this year? Yes, but identifying these companies with any degree of certainty is easier said than done.

CPL Resources, Diageo and Greencore have indicated to the Irish Stock Exchange that they are due to pay dividends within the next two months, but whether or not these shareholder payouts materialise remains to be seen.

According to analysts, FBD is likely to continue paying a dividend this year. Goodbody Stockbrokers estimate a dividend yield of 9.7 per cent for the insurance firm this year, rising to 10.2 per cent in 2010.

Industrial holdings group DCC is expected to deliver a yield of 5.1 per cent in 2009, as will Paddy Power, according to Goodbody projections. Fyffes is expected to have strong yield of 7.7 per cent this year, while the stockbroker projects an 8.8 per cent yield from CC. Small, growth-oriented companies tend to have low dividend yields (or a policy of paying no dividends at all) as they plough profits back in to drive expansion.

When selecting stocks, it makes sense for dividend investors to concentrate on well-established companies in defensive sectors, which have a strong cash position, low levels of debt and a history of generous dividend payouts.

Unfortunately, though, in the current volatile climate, there is no such thing as a sure bet when it comes to dividends.