6 Warning Signs a Company May Cut Its Dividend

Written by The Dividend Guy on July 4, 2008

Dividend Cut Warning Signs

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)


Recommended: ING DIRECT makes $aving money simple! Open your account online today and start earning 3.00% variable APY. No Fees and No Minimums!

del.icio.us| Digg| Furl| Reddit| Google| StumbleUpon| Technorati| Help|

8 Comments so far

  1. Dividend Investing July 4, 2008 10:42 am

    This is a good list of warning signs. However, once a company eliminates a dividend, generally the stock has already declined significantly in value. Another yellow flag is a company that has grown its dividend at a specific rate over an extended period of then has an increase that is at a lower percentage rate. Also, a company’s payout ratio may be increasing over time. With an investor paying attention to these two additional factors, slowing dividend growth rate and higher trending payout ratio, they may be able to exit the stock before a significant decline in the price.

  2. JLP’s Roundup (July 4, 2008) | AllFinancialMatters July 4, 2008 12:45 pm

    […] Dividend Guy has 6 warning signs that a company may cut its dividend. - This is particularly important now that lots of financial stocks look like they have really high […]

  3. The Financial Blogger | Financial Rambling July 5, 2008 4:01 am

    […] In a time where the stock market isn’t going so well. Some people are hiding behind good paying dividend stock. The Dividend Guy write about signs that will tell you when a company potentially drop its dividend. […]

  4. The Carnival of Personal Finance: American Flag Edition | Mighty Bargain Hunter July 7, 2008 12:58 am

    […] The Dividend Guy lists six warning signs that a company could cut its dividend. […]

  5. Check Out the Latest Carnival of Personal Finance - Consumerism Commentary: A Personal Finance Blog July 7, 2008 12:59 pm

    […] 6 Warning Signs a Company May Cut Its Dividend […]

  6. Dividend Growth Investor July 7, 2008 2:22 pm

    As a long-term investor, I try not to pick too much on warning signs, because they could be part of year over year “noise” in the data. What happens if your dividend holding keeps on increasing dividends for 10 years while the EPS is flat and the DPR rises from 20% to 95% at the end of the period? When do you sell?
    I could tell you that on year 10 I won’t be initiating a position. But when do you sell? And if you are in the market for the long-term compounding effect, then do you really care about “warning signs”?

  7. ZooMNFinancial July 8, 2008 11:23 am

    Looking at your signs of a possible dividend cut / decrease I would like to see what you think about PFE.

    Warning Sign #1: It’s a no-moat company or its moat is drying up

    CashCow meds are coming to an end - Nothing in the pipe line?

    Warning Sign #2: An established string of dividend increases just came to a halt

    Increased in 2008 for the 10th straight year

    Warning Sign #3: It’s the highest-yielding stock in its industry

    7+% yied is highest from what I can find. Per Reuters .81 is industry

    Warning Sign #4: It’s got a payout ratio above 80%

    116% - Hgh? I’m a new investor but I would think that constitutes a high figure.

    Warning Sign #5: The company has a lot of debt

    I don’t know what constitutes HIGH debt but a Total debt to equity of 25.29 vs 9.81 for industry seems out of the norm.

    Warning Sign #6: Major event risks are on the horizon

    Lipitor coming to an end and the ever growth of generics has to be worrying the management. The potential for paying a premium for a company with a pipeline might eat at the cash possition.

    Looking at a 10 - 20 year investment with reinvestment of dividends. Worth it?

  8. Carnival of Personal Finance - Time to Give Lots of Link Love! | Fix My Personal Finance July 14, 2008 2:19 am

    […] The Dividend Guy lists six warning signs that a company could cut its dividend. […]

POST A COMMENT

If you would like to make a comment, please fill out the form below.

Name - (Required)

Email - (Required but not published)

Website - (Optional)

ENTER YOUR COMMENTS BELOW






Student Loan

www.financialwebring.com