Dividends4Life: How to Tell Whether Your Stock’s Dividend Is Sustainable

It’s always good when a company decides to distribute its profits to shareholders in the form of a dividend, and it’s especially nice when that payout translates to a healthy yield. But for investors — especially young ones looking for long-term income investments — the sustainability of said dividend is paramount. Let’s break down the data that can help you decide whether a stock’s dividend can keep chugging along or if a cut is on the horizon. We’ll also shed some light on a few important exceptions.

The quickest back-of-the-napkin calculation to decide whether a dividend is sustainable is called a “payout ratio” — the relationship between the company’s annual dividend payout per share and the company’s annual earnings per share. The important part of that equation for sustainability isn’t the yield, though — although the yield is often a good clue; I find that anything north of 6% or so is worth a closer look. A stock might boast an outsized yield because the share price has fallen dramatically, the company paid a special dividend or because it is trying to make up for a lack of organic growth.

Source: InvestorPlace

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