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Last week I wrote about what to do if the dividend on your stock holding is cut. I wanted to take this a step further and have done some investigation on what some of the dividend investing experts have suggested are some warnings signs that a dividend may be at risk of being cut. This list comes from the author of the book The Ultimate Dividend Playbook. In my opinion, Josh Peters has put together the most comprehensive and valuable list of warning signs an investor can use during their dividend analysis to determine the risk of a cut. I present this list with full-credit attributed to him.
Warning Sign #1: It’s a no-moat company or its moat is drying up
The competitive advantage of the company is at risk and one or many companies are nipping at its heels to take over dominance of the industry.
Warning Sign #2: An established string of dividend increases just came to a halt
If your company has been a part of the Dividend Aristocrats and then all of a sudden it has stopped increasing its dividends, then things are not well at the company!
Warning Sign #3: It’s the highest-yielding stock in its industry
Being the highest yielding stock in the industry is not necessarily a good thing. It may indicate that the company is not performing as well as its peers.
Warning Sign #4: It’s got a payout ratio above 80%
Dividend payments to investors need to come from earnings, and if the dividend payments are taking an increasing bite out of earnings then the company may be at risk of not being able to afford that next dividend payment.
Warning Sign #5: The company has a lot of debt
Nothing sucks up cash flow and earnings growth than huge amounts of debt. The more debt a company has, the less resources it has to make dividend payments.
Warning Sign #6: Major event risks are on the horizon
This can vary widely, however it can be things like government regulation changes or lawsuits. Keep your eye on these major events and see how they might impact your dividend growth.
At the end of the day, we as dividend investors are trying to invest only in companies that are consistently and constantly growing their dividends. These warnings signs from Josh Peters are very valuable in helping us to determine if that dividend growth is at risk!
(Photo Credit: ivan freaner)