Here's What Safe Dividend Stocks All Have in Common
At a base level, a stock is a claim on the long-term cash flows of a company, with dividends being a cash return on that claim. If you are a dividend investor trying to live off of the income you generate from your portfolio, you'll want to make sure your "claim" on cash flows is backed by a very strong company. Here's why you need to think past the most common dividend quality metric and consider dividends with a more holistic approach.
When dividend investors start out, the first thing they are likely to learn about is the payout ratio. It is an important measure of dividend safety, but it has some problems. For starters, the math behind the payout ratio is to take the most recent dividend, annualize it, and then divide that number by earnings. Lower numbers suggest safer dividends, while a number over 100% suggests a dividend that could be at risk, since earnings aren't enough to cover the dividend. Always check out the payout ratio.
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Source Fool.com
