3 Red Flags Telling You It’s a Bad Dividend Stock


Are you nervous yet?

I mean, did you finally figure out how to tame the market?

Were you part of investors who lost money in 2018, or where
you part of those who “sold right on time?”

Or maybe you are like me and couldn’t care less about what
is happening daily on the stock market. I don’t really mind because I know my
dividends are safe and my portfolio will continue to thrive in the future. Here’s
what I understood after many years being fully invested in the market:

You can’t control the market (e.g. it will go up and down all the
time), but you can control what’s in your portfolio.

But that’s obviously easier said than done. How could you
sleep well at night when the market is going crazy? (Note: the market is going
crazy at least once every 6 months!). While I don’t overanalyze what is
happening between the U.S. and China and I don’t waste my time predicting the
price of oil or gold, I do spend a lot of time watching companies in my portfolio
and make sure they don’t show red flags. Those red flags that announce the
company isn’t doing so well and that they might eventually cut their dividend.
Here is my list of red flags I watch quarterly among all my holdings.

With any red flags, these are not sure shot rules. It’s not
because you see one of many factors happening at the same time that the stock
is an automatic sell. It doesn’t mean the company will cut its dividend either.
But it gives you a very good idea that this specific stock isn’t as strong as

01 Trust the market – beware of high dividend yield stocks

My first indication that something is wrong is usually the
market. While I don’t rely on it, there is still a part of truth speaking from
its mouth. When a sector or most of the market follow the same movement, it’s
hard to understand what the market is telling us. However, when you see
companies that are getting beaten down more than others, this is a sign that
something is not right.

If you have been reading my blog for a while, you already
know I’m not too keen on high yielding stocks. High dividend yielding stocks
(5%+) often offer either a higher degree of risk or poor growth perspectives.
Since I’m not looking for an immediate source of income, I don’t have to bother
with high yielding stocks. However, whenever I hold a stock where the yield goes
over 5% (like Enbridge (ENB) for example), I will pay more attention.

Remember, there is no free lunch in finance. If you are unsure about the overall performance of high yielding stocks, I’d suggest this article at Dividend Monk (yes, I author both blogs).

02 Absence of dividend growth

Last year, I wrote an article about dividend
cuts in disguise. This article discussed how your precious quarterly
payments get eaten alive by inflation if the company doesn’t increase its
payout from time to time. When a company maintains its dividend or barely
increases it for a few years, you can raise a second red flag (especially if
the dividend is 5%+).

The absence of dividend growth or a minimal increase not
covering inflation is definitely a signal that the business isn’t doing too
well. In 2018, we had some well-known companies announcing dividend cuts. I’ve
taken three of them to highlight my point.

Owens & Minor
The medical supplies distributor had paid uninterrupted dividends
since 1977, but was forced to cut its dividend as the business struggled. Over
the past 5 years, OMI had increased its dividend consistently for a total of 4%
(from $0.25 to $0.26) before the dividend cut.

General Electric
Before cutting its dividend twice (ugh) in 2018, GE had increased its
dividend from $0.22 to $0.24 (9%) in the past 4 years.

L Brands (LB):
Victoria’s Secret brand maker hasn’t increased its dividend since 2016. In
November 2018, it announced a 50% dividend cut.

Source: Ycharts

We can see a similar trend on the Canadian market with
Cominar (CUF.UN.TO), Corus Entertainment (CJR.B.TO), and Peyto Exploration
(PEY.TO). Each company stopped increasing its dividend for a while before
announcing their dividend cut.

Source: Ycharts

When a company is slowing
down its dividend growth policy or simply “forgets” to increase its payment for
more than a year, take a serious look at the reasons why it’s happening.

Here’s my complete guide
to avoid dividend cuts

03 Weak dividend triangle

The Dividend
Triangle is composed of three metrics:

Revenues: A
business is not a business without revenue. What is the difference between a
company making growing revenue from a company showing stagnating results?
Competitive advantages.

Earnings: You
can’t give money if you don’t make money, right? Then again, this is a very
simple statement. Still, if earnings don’t grow strongly, there is no point of
thinking that the dividend payment will increase indefinitely.

Dividends: Last,
but definitely not the least, dividend payments are the *obvious* backbone of
any dividend growth investors. But I don’t mind the dollar amount or the yield,
I solely focus on dividend growth.

Companies losing market shares due to the lack of
competitive advantages will see its story through its revenue trend. It is very
rare to see any business publishing growing revenue year after year. For many
reasons, a company could publish weaker results. It could be the end of a
cycle, a change in the business model, or simply the economy slowing down.
However, if this situation persists for several years and management can’t find
growth vectors, the red flag must be risen.

The same logic applies to earnings. Since earnings
calculations are based on GAAP, we are not talking about real money. This
number is far from being perfect. In fact, you are better off combining it with
free cash flow or cash flow from operations to see what is really going on.
Nonetheless, if a company is unable to generate growing EPS over a long period
of time (5 to 10 years), chances are dividend growth will not follow.

Finally, as I discussed earlier in this article, a lack of
dividend growth is definitely a sign there is a problem that must be
investigated. When management is confident enough to raise their payouts by
4-5% or more each year, I can sleep well at night and I really don’t mind what
is happening in the market. Sooner or later, the market will bounce back and
dividend growers are among companies that will thrive.

There are more red flags

If you can avoid all dividend cutters, your portfolio should
beat your benchmark easily. Successful investors often avoid dead stocks and
dividend cutters while keeping dividend growers in their portfolio. Looking at
revenues, earnings, dividend growth and dividend yield are part of the basic
red flags that could be risen for any dividend stock. There is definitely more
to it.

This Thursday, I will host a free webinar about identifying
red flags while you look at your portfolio. Those signals will tell you which
stocks deserve your attention and which ones require immediate action; read:

We all know how painful it is to see one of your holdings going
down 40%. There are ways you can avoid making those mistakes (most of the
time!). If you read this post
late, you can still use the link to watch the free replay.

here to register to the webinar (it’s free, but requires
your email)

Topic: Identify Red Flags Telling You It’s a Bad
Dividend Stock

Date: Thursday, January 31st at 1pm EST


  • In
    this webinar, I will discuss metrics I follow to identify rotten apples in
    my portfolio. Since 2013, none of my holdings have suffered a dividend cut in
    my DSR portfolios. I’m sharing what we look at to make sure we keep the streak
  • You
    must register with Webinar Ninja to attend (if you did it in the past, no new
    registration is required). This is completely free and the webinar is free also. Webinar
    Ninja is the platform we use to run all our webinars. It works well and
    provides an optimal experience for everybody.
  • The
    presentation is about 30-35 minutes.
  • There
    will be a Q&A session of about 25-30 minutes.
  • The
    webinar works on Google Chrome or Safari from a laptop or computer.
    (It is not compatible with smartphones or tablets.)
  • If you can’t make it
    on time, there will be a full replay available, but you must register to access

here (free – email

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