Companies with historically strong dividend payouts may not be the best bet for a secure retirement income, with new analysis suggesting retirees should look beyond headline yields and focus on a business's future growth prospects.
AMP Capital portfolio manager Dermot Ryan says often retirees who rely on income from their asset base after leaving the workforce - whether it be through a self-managed super fund or a regular superannuation fund - skim the surface by looking at dividend yields rather than a company's growth strategy, cash flow and balance sheet.
He said companies that have paid high dividends in the past won't necessarily keep doing so.
An AMP analysis found that, on average, companies in the top 10 per cent of expected dividend yield suffer negative earnings growth, negative dividend growth and underperform the market over time - tell-tale signs their dividend is unsustainable, Mr Ryan said.
"Some of these factors aren't immediately apparent until you scratch the surface," he said.
"Some companies will give investors what they want because it attracts investors, stimulating demand for their shares.
"But without sufficient earnings to support high dividend payments this approach looks more like a short-term ploy as opposed to a long-term strategy."
Mr Dermot said a high payout ratio - where a large chunk of profits is handed to investors rather than reinvested in the business - is often an early sign a company is stretching itself to deliver regular income to investors.
Borrowing to finance dividends can also be an issue, suggesting management is trying to make a stock more attractive to income-hungry investors.
Mr Ryan advised retirees to consider areas of the share market such as the energy sector where dividends might be low but free cash flow and earnings are generated and business conditions are picking up.
February's reporting season was the best, on a profit basis, since 2010 and delivered average dividend growth of about 3.5 per cent on a year ago.
Soaring commodity prices made the resources sector a particular standout, with dividends increasing 25 per cent compared to a year ago, a contrast to previous years where growth was particularly strong in the banks, financials and infrastructure.
"We think resources are in a very attractive space at the moment and we see a lot of opportunities for capital return both in the form of dividends, special dividends and buybacks," he said.
In February, Rio Tinto delivered a record final dividend of $US1.80 per share, after stronger commodity prices nearly doubled its full year profit, while rival BHP Billiton more than tripled its final dividend to 43 US cents a share.
With more than $4 billion in proceeds from recent asset sales, Rio Tinto is again expected to be rewarding shareholders with boosted returns, possibly via a buyback.
Mr Ryan said the once-dominant banks are now trying to simply sustain their dividend in the face of regulatory pressures and a slowing domestic property market.
