The one number that tells you if a dividend is safe

Most investors skip this check. Don’t be most investors.

Quick question for you:

How do you know if a company can afford its dividend?

Not “hopes to keep paying it.” Not “has a long streak.” Can it afford it, right now, with real cash flow?

Most investors never ask this. They see a 5% yield and assume everything’s fine. Then one earnings report later, the dividend gets slashed, and the stock drops 20%.

Here’s the simplest way to check:

Look at the payout ratio. Specifically, the free cash flow payout ratio.

Take the total dividends a company paid and divide by its free cash flow. That’s it.

Below 60%? The company has breathing room. It can reinvest in the business, pay down debt, and still comfortably cover the dividend.

Above 80%? That’s a warning sign. The company is spending almost all of its earnings just to maintain the payout. One bad quarter, and the dividend is in trouble.

Between 60–80%? It depends on the industry. A utility or REIT can run higher because its cash flows are predictable. A cyclical business at 75%? That’s thin ice.

This is one of the first things I check before I even think about buying a dividend stock. It takes about 30 seconds, and it’s saved me from more than a few dividend traps over the years.

Try it on a stock you own. Pull up the cash flow statement, find the free cash flow, and divide the total dividends into it. You might be surprised by what you find.

Talk soon,

Dave