Dividend Safety Signs and Warning Flags

Posted on September 20, 2012 | Investing

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.

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.

Clearly, dividend-seeking investors need to evaluate the dividend payments themselves, how steady they have been and how much you are paying for them.

A dividend stream may be important to you, but a critical question is: How much is the market demanding for that stream of payments?

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