Ever see a stock with a juicy 10% dividend and feel like you’ve hit the jackpot? 🤑
Hold on. That high number might be a warning siren, not a dinner bell. Many investors get burned chasing high yields, only to see the dividend get cut and their investment shrink.
A dividend is only valuable if it’s safe and has room to grow. Otherwise, it’s just the company handing you back your own money while the business itself falls apart.
Before you buy any dividend stock, protect yourself by asking these three simple questions.
1. Is the Payout Safe? 💰
A dividend is paid from a company’s profits (its earnings). The “payout ratio” tells you what percentage of those profits are being paid out to investors.
Imagine you earn $5,000 a month. Would you promise to give away $4,800? Probably not. You need a buffer for unexpected costs and savings.
It’s the same for a company. A payout ratio below 80% is a good sign. It means the company has enough cash left over to reinvest in the business and survive a tough year without cutting your payment.
2. Can the Dividend Grow? 🌱
A dividend that stays the same year after year is actually losing you money because of inflation. A $100 dividend buys less pizza today than it did five years ago.
You don’t just want a dividend; you want a dividend that gets a raise.
Look for companies that are consistently growing their earnings. If the company’s profits aren’t growing, its dividend can’t grow either. A stagnant business with a high dividend is a major red flag.
3. Does It Have a Secret Weapon? (A “Moat”) 🏰
What protects a company from its competition? A strong brand, unique technology, or loyal customers create an “economic moat” like a castle moat protecting it from invaders.
Think of Apple’s ecosystem or Coca-Cola’s global brand. These moats protect their profits, making their dividends incredibly reliable.
A company with a strong moat is far more likely to keep paying and growing its dividend for decades to come, through good times and bad.
The takeaway?
Stop chasing yield. Chase Total Return.
Your true return is the dividend yield PLUS the growth rate. A rock-solid company with a 3% yield that’s growing at 7% per year is a much smarter investment than a shaky company with an 8% yield that’s going nowhere.
Which of these 3 rules was most helpful for you? Let me know below! 👇