Is Your Dividend Safe?

Typically, when a company cuts its dividend, the share price falls hard. Even leaving the dividend the same can be seen as extremely negative if a company has a long track record of raising dividends. So when investing for income, yes, you want to receive a solid yield and one that is growing every year. But you need to ensure that the dividend growth is sustainable.

Here’s how: Look at a company’s payout ratio. The payout ratio is the percentage of a company’s profits that is paid out in dividends. The calculation is simple. Divide dividends paid by net income. If a company has $100 million in profits and paid out $50 million in dividends, the payout ratio is 50 percent ($50 million divided by $100 million). Generally speaking, I look for companies with a 75 percent payout ratio or less. That way, if the company reports weak earnings, there is still enough of a buffer to continue to pay (and hopefully raise) its dividend.

Source: U.S. News & World Report

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