What to Look For When Investing in Dividend Stocks

Here’s a video a portfolio manager said about GE stock 3 years ago… https://www.youtube.com/watch?v=RA7oVr4wQ28

Notice what he said back then “The company recently boosted its quarterly dividend by 5%, to $0.23 a share. General Electric offers a 3.8% dividend yield, which is at the high end of the industry rage and far in excess of what the S&P 500 index and benchmark 10-year U.S. treasury note yield.”

See anything missing? How is that dividend being financed???

The irony here is that the Wall St. Journal article I cite in MY video talks about the obviousness of GE dividend being in a world of hurt.

Really??? Did the WSJ writer mention this a 18 months ago when it would have actually done someone any good?

I highly suspect not.

So, what’s the lesson here? If you’re buying dividend stocks, know how the dividend is being paid for!

is it being paid from NET EARNINGS??? If not, why not? Did the stock have a bad quarter and they had to dip into cash reserves to finance the dividend payment?

Doing this one or two times is not a big deal. But doing it consistently, quarter after quarter is a recipe for disaster because that means the payment is not sustainable.

When the cash runs out, then how do they make payments? The only other way is to borrow.

Do you really want your company to borrow at say 4% interest to pay a dividend because its cash flow has been depleted???

If borrowing is off the table and the cash flow is exhausted what’s the remaining alternative?

Reduce the dividend. And when that happens what do you think happens to the stock price???

Take a guess.

The lesson here. Look at payout ratio. A company that is using most of its earnings to pay a dividend could be in trouble to maintain that dividend when bad times come.

A company that doesn’t have enough cash flow to finance its dividend, is going to be in a world of hurt at some point.


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