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How To Determine If Your Dividends Are Safe



October 12, 2017 – Comments (0) | RELATED TICKERS: MMM , PG , TGT

As dividend growth investors, our goal is to buy shares in a company that will shower us with cash for decades to come.

One of the important things to look out for in our evaluation of companies involves determining the safety of that dividend payment.

A quick check to determine dividend safety is by looking at the dividend payout ratio. This metric shows what percentage of earnings are paid out in dividends to shareholders. 

In general, the lower this metric, the better. As a quick rule of thumb, I view dividend payout ratios below 60% as sustainable. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

For example, dividend king 3M (MMM) earned $8.16/share in 2016 and paid out $4.44 in annual dividend income per share. The dividend payout ratio is a safe 54%. This means that this dividend king is likely to continue rewarding its long-term shareholders with a dividend increase into the future. This will further extend 3M's streak of 59 consecutive annual dividend increases.

However, there are exceptions to the 60% payout ratio rule. 

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