Five checks that catch most dividend cuts before they happen.
A high yield is more often a warning than a bargain. Yield rises when price falls, and price usually falls because the market doubts the payment. These five checks catch most cuts before they are announced, and they take about ten minutes.
Divide dividends per share by earnings per share. Below 60% generally leaves room to keep paying through a weak year. Approaching or above 100% means the company is paying out more than it earns, which can only continue while conditions hold.
Earnings can be shaped by accounting choices; cash cannot. Divide the total dividend by free cash flow. If the dividend consumes nearly all of it, there is nothing left for debt repayment, reinvestment or a bad year.
Check interest coverage: operating profit divided by interest expense. A heavily indebted company facing weak coverage will protect lenders before shareholders, because it has no choice. Debt maturities landing soon make that more urgent.
The same payout ratio means very different things for a utility and a miner. Ask what this payout ratio would look like in a bad year for this industry, not a normal one. Cyclical businesses need far more headroom for the same level of safety.
A long record of increases signals both capacity and management commitment, and companies with such records cut only as a last resort. A history of freezes, cuts or erratic special dividends tells you the payment is treated as discretionary.
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