Safe Dividends

MarketWatch has an article on how to tell if dividends are safe. Looking at payout ratios are important. If the payout ratio is high, it might not be a sustainable dividend payout rate. Also, keep an eye out for the company’s cash flow as well.

Greg Newman on Dividend Sustainability

How do you know that a dividend will be sustainable? Look at the payout ratio. Is it a percentage of EPS or free cash flow? Which matters more for the stock? Also look at the top line–what is the top line estimated with pretty good visibility to be growing at. What is the trajectory of say the payout ratio, creeping up? If so, not good. Or going up?

The advice is to look at the payout ratio, whether it is a percentage of EPS or free cash flow, and which matters more for the stock.