3 Red Flags Dividend Investors Should Watch

By: Wayne Duggan

Interest rates are near their lowest levels in history, giving yield investors few viable options for generating reliable income. One of the best ways for investors to get quarterly income is by owning stocks that pay dividends. Unfortunately, a stock’s dividend is only as good as the company that pays it. 

Here are three things to look at to determine whether or not a dividend is at risk.

1. Payout Ratio
Payout ratio is a financial metric used to assess the financial strain a stock’s dividend payment is putting on the company. Payout ratio is simply the company’s annual dividend payment per share divided by its annual earnings per share, and it tells investors what percentage of the company’s total earnings are going right back out the door to cover its dividend.

Ideally, a company’s payout ratio would be below 50%.

For example, AT&T shares pay an attractive 6.7% dividend, but the company’s payout ratio is above 130%. In 2019, prior to the pandemic, AT&T reported $1.89 in EPS. That same year, the stock paid out $2.04 in dividends per share. AT&T might not cut its dividend any time soon, but it is certainly putting a strain on the company’s finances at the moment.

2. Dividend History
One of the best predictors of what a company is going to do in the future is what it has done in the past. Before snatching up shares of a stock paying a 6% dividend, check to see how those dividend payments have changed in the past.

For example, AT&T’s payout ratio may be high, but its history reveals a company that is deeply committed to its dividend. AT&T has been consistently raising its dividend by four cents per share going back to 2008. Even during the financial crisis, AT&T was raising its dividend. A company that has been committed to maintaining and even raising its dividend during hard times is probably less likely to cut it in the future.

3. Long-Term Revenue Trends
The final red flag that a dividend may be too good to be true is that the underlying company is in secular decline. For example, paper company International Paper pays an attractive 3.6% dividend. However, the company’s trailing 12-month revenue is down more than 20% over the past decade, and many investors see global digitization as a long-term threat to the paper industry.

Tobacco companies, oil companies and shopping mall retailers are just three examples of the types of companies that may not be able to survive in the long term. Counting on these types of companies to keep paying their dividends two or three years down the road could be risky.

The author holds no position in the stocks mentioned.

Active Trading with Lightspeed
Lightspeed provides professional traders with all the tools required to help them find success in stock trading, and we have been developing and honing our active trader platform to offer an optimal user experience. With the intuitive interface layouts and institutional quality stock and options scanners, we aim to help traders reach their goals, no matter what their strategy is. We also offer our clients some of the lowest trading fees in the industry.

For more information on a professional trading platform with Lightspeed, please call us at 1-888-577-3123, request a demo or to open an account.

Lightspeed Financial Services Group LLC is not affiliated with these third-party market commentators/educators or service providers. Data, information, and material (“content”) are provided for informational and educational purposes only. This content neither is, nor should be construed as an offer, solicitation, or recommendation to buy or sell any securities or contracts. Any investment decisions made by the user through the use of such content is solely based on the users independent analysis taking into consideration your financial circumstances, investment objectives, and risk tolerance. Lightspeed Financial Services Group LLC does not endorse, offer nor recommend any of the services or commentary provided by any of the market commentators/educators or service providers and any information used to execute any trading strategies are solely based on the independent analysis of the user.

You may also be interested in...

What Investors Need to Know About China’s Tech Stock Crackdown
Read More
The IPOX® Week, July 19th, 2021
Read More
The IPOX® Week, July 12th, 2021
Read More
Economic Mid-Year Recap of 2021 with Mark Schug: Webinar Recap
Read More

Try the demo

Compare Platforms
Check the background of this firm on FINRA's BrokerCheck

Our website uses cookies to improve the performance of our site, to analyze the traffic to our site, and to personalize your experience of the site. You can control cookies through your browser settings. Please find more information on the cookies used on our site in our Privacy Policy. By clicking OK, you agree to allow us to collect information through cookies.

OK