Dividend Safety Signs and Warning Flags
by Maria Crawford Scott
Many investors have sought shelter from the stock market storm in more mature dividend-paying companies, since the income from these firms provides at least some positive return in an otherwise bleak environment.
But the economic downturn has tested even the most mature and stable firms, with some forced to cut dividend payments. Others have managed to maintain current levels for the time being, but could be forced to make cuts in the future.
In this article
- What Is the Level and Quality of Payments?
- How Well Are Dividends Covered?
- Can Debt Be Repaid?
- What Are the Long-Term Trends?
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What signs can you look for that indicate the safety of a company’s dividend payment stream?
Investors in dividend-paying stocks typically seek stocks that are paying steadily increasing levels of dividend income, and have the cash flow and financial resources to continue to pay the dividends. There are a number of financial ratios and indicators you can use to evaluate this; the most common are listed below.
While these safety signs and warning flags are applied at the individual firm level, you should keep in mind that even the most well-managed company can be overwhelmed by changing winds within an industry. When you are evaluating a stock for its dividend payments, make sure you don’t lose sight of the bigger picture in terms of the environment in which the firm is operating.
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Discussion
Your "download printable PDF" link doesn't seem to be working "Error Loading Page." Windows XP, Firefox Ver. 3.6.8
posted over 2 years ago by Jeff from Illinois
No discussion board on this question.
What do you do when you have spent years developing a DRIP portfolio and companies such as BAC, C, no longer have a dividend but the price is too low to sell? Others such as GE have cut their dividends in half but the price is too low to weed them out of the portfolio as well. Is this worth a journal article? I believe it is. In the meanwhile would you please share with me on an individual basis? I really need the help.
posted over 2 years ago by Robert from Virginia
Stocks like this you sell as soon as they cut the dividend or it looks like they are going to cut. I owned all three of these stocks and sold all. C and BAC I sold when in the 30,s when there was a lot of discussion about them cuting. GE I sold when they cut even though there was a lot of talk they were going to cut. Instead I listened to that lying jerk Jeffrey Imheld who kept saying they would defend the dividend up to the day they cut.
posted about 1 year ago by Douglas from Pennsylvania
This article has been very helpful. I realize that all of that data needed is available from the company's latest 10-K report and prior year reports. My question is whether there are any online resources that publish such data gleaned from these reports?
posted about 1 year ago by James from New York
Great article! Douglas, thanks for naming names, i.e., Imelt...fabulous! With you 100%.
Just now beginning to get into dividend stock investing, very late in life. Was turned on to it by an article by David Knapp (not sure of last name) from Seeking Alpha. I'm one of those who have some sort of nest egg total and now I'm trying to figure out how to generate income without "amputating" my investments altogether. The idea of selling stocks, etc., in order to supplement my SS and rental property income is not sitting well with me. Onward!
posted about 1 year ago by Larry from Georgia
This article is ver basic and helpful for a beginner investor.
posted 9 months ago by Carlton Boyles from North Carolina
Steve Selengut has an excellent book on income investing. Pretty safe and very good income using a mix of CEFs and Investment grade dividend equities. Check Amazon or Google books for a preview of his book.
posted 3 months ago by Dennis from New Jersey
This a good article that makes a lot of investment sense, yet it lacks practical knowledge of how to actually obtain the information needed to calculate some of these ratios. For example, where does one go to easily obtain the information about Dividend Growth Rate over the past 5 years?
posted 3 months ago by Michael from Connecticut
I let Vanguard do the picking for me. They have far more expertise than I ever will. The don't charge much.
posted 3 months ago by Richard Lund from Washington
As always the devil is in the details or in this case the ticker. Let's see some practical application of these principals with stocks/industries in the news.
posted 3 months ago by R N M from California
