How to Tell if a Stock's Dividend is Safe - Dividend Investing 101

TL;DR

Learn how to analyze a company's dividend safety by looking at the dividend coverage ratio, dividend growth rate, earnings growth rate, free cash flow per share, and price to earnings ratio.

Transcript

Hi, I'm Jimmy in this video, I'm going to walk through some simple steps to help us get a better idea if a stock's dividend is safe, going through these steps will help us protect our money and give us the best chance of increasing the amount of passive income that we can bring in from stock dividends without doing too much extra work. Okay, let's ... Read More

Key Insights

• 🥳 The dividend coverage ratio and dividend payout ratio can provide an indication of a company's ability to pay dividends.
• ☠️ Analyzing the dividend growth rate and earnings growth rate helps assess the overall growth and sustainability of a company's dividend.
• 🥶 Checking both earnings per share and free cash flow per share helps determine if a company has sufficient resources to support its dividend payments.

Questions & Answers

Q: What is the dividend coverage ratio, and why is it important?

The dividend coverage ratio is calculated by dividing earnings per share by dividends per share. This ratio indicates whether a company can afford to pay its dividends. A higher ratio suggests a safer dividend.

Q: How can the dividend growth rate and earnings growth rate help determine dividend safety?

The dividend growth rate shows how much a company's dividend has changed from year to year, providing insights into its overall growth. The earnings growth rate compares the growth of a company's earnings per share, indicating its ability to sustain dividend payments.

Q: Why should investors pay attention to free cash flow per share?

Free cash flow per share is important as it measures the cash generated by a company that is available for dividends. Comparing this figure to dividends per share helps assess whether a company has enough resources to maintain its dividends.

Q: How does the price to earnings ratio contribute to dividend safety analysis?

While the price to earnings ratio does not directly relate to dividends, it helps determine the fair value of a stock. Overpaying for a stock can potentially limit total returns, even if the dividend appears safe.

Summary & Key Takeaways

• Analyzing a company's dividend safety involves looking at key numbers such as the dividend coverage ratio, dividend growth rate, and earnings growth rate.

• Comparing the dividend per share and earnings per share can provide insights into the sustainability of a company's dividend.

• Checking both earnings per share and free cash flow per share can help determine if a company has enough resources to support its dividends.

• Considering the price to earnings ratio can help assess the fair value of a stock and avoid overpaying.