2 Signs That Your Dividend Isn’t Safe

Dividend-paying stocks have historically been excellent vehicles to hold for long-term wealth creation. However, there is also a drawback. Investors often see dividends as a safety net. They often believe that a dividend is guaranteed, and it will put a floor under a stock. But this couldn’t be further from the truth. Dividends can be cut, and furthermore companies that pay dividends can lose money and even go bankrupt. General Motors (NYSE:GM), Bank of America (NYSE:BAC), and General Electric (NYSE:GE), which are all large, “blue-chip” companies cut or eliminated their dividends during the financial crisis. General Motors went bankrupt, and if it weren’t for the government and Federal Reserve bailouts, Bank of America and General Electric would have gone bankrupt as well.

So how do you know what to look for before disaster strikes what appears to be a safe and steady dividend-paying investment? 1. Avoid stocks with excessively high dividends - Stocks with very high dividends may look cheap, but there is a reason that they are trading with these valuations. 2. Avoid stocks that are not paying their dividends from cash-flow - The idea behind a dividend is that a company generates operating cash-flow, and it can do many things with this money, including rewarding shareholders with dividend payments. However, if there isn’t any cash-flow, then the company shouldn’t be paying dividends.

Source: Wall St. Cheat

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