High Dividends Are Dangerous

Dividend stocks have outperformed their non-dividend-paying peers for decades. There’s absolutely no denying the power of reinvesting your dividends and being paid quarterly or annually to hold the stock you own. Dividend stocks, simply put, are value-creating machines.

I have two suggestions that can help you feel more comfortable about the dividends you’re currently receiving. First, take a look at the company’s payout ratio; this metric tells you what percentage of a company’s net income is being paid out in cash. A high payout ratio (anything more than 60% deserves a red flag, in my book) means that a company may have issues continuing its dividend in the future and warrants additional attention. Second, look at the company’s history. Has it been paying dividends for quite some time? Has it consistently been increasing those dividends? If you can answer “yes” to both, chances are that your dividends are relatively safe.

Source: Motley Fool

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