Tuesday's stock market selloff has scared flocks of investors into the "safety" of 10-year Treasury notes, driving yields below 3% -- a 14-month low. Of course, higher-priced Treasuries are more susceptible to interest rate risk (if interest rates double, principal value will be halved). Thus, a seemingly innocuous investment may actually be incredibly risky. If this trend continues, fixed-income investors (read: retired persons) will find themselves in a precarious position: How much capital can be sacrificed for current income?
Unfortunately, there are no risk-free investments, but a "dividend acid test" can be used to determine the relative safety of an income investment. Dividend Acid Test Formula
(10-Year Treasury Yield) less than (Stock Dividend Yield) less than (Liability-Adjusted Cash Flow Yield) By ensuring that the stock's dividend yield is less than the liability-adjusted cash flow yield (LACFY), investors can be reasonably confident that an operational incident or upcoming debt maturity won't derail their dividend check.
Source: TheStreet.com
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