Dividend Coverage Ratio Explained: Avoid Painful Dividend Cuts

If you’re reading this, it’s because you want 2 things:

  1. Reliable income.
  2. To make your money grow.

One of the best ways to achieve both of those is by following my favorite investing strategy:

Dividend growth investing.

If you don’t know what this is, it consists of building a portfolio of high-quality stocks.

These stocks will pay you dividends which will likely increase every single year.

The key to being successful with dividend growth investing is being able to know if a stock will increase its dividend.

And more importantly…

How to avoid painful dividend cuts!

Dividend Cuts & Suspensions – An Investor’s Worst Enemy

As I write this, we’re in the middle of the coronavirus market crash.

In times like these, companies make fewer sales, earn less money, and are sometimes forced to cut or eliminate their dividend.

The last thing you want is to experience a dividend cut…

dividend cut

Not only will you lose income, but the stock prices of companies tend to plummet after a dividend cut announcement.

So…

How can you avoid dividend cuts and ensure you’ll get reliable, growing dividends which should also grow every year?

One of the easiest ways to determine this is the dividend coverage ratio.
(This is similar to the payout ratio – more below).

What Does Dividend Coverage Ratio Mean?

The dividend coverage ratio (also called dividend cover) measures how well a company’s earnings cover the dividend.

You see, buying a stock is no different from buying a business.

Warren Buffet always talks about this in his many talks and interviews. In his opinion, investors should focus more on the underlying business and not as much on the stock price.

As one of the world’s richest people, I’d say he knows a thing or two! 😉

When you buy a piece of a business, you should understand some of its important metrics.

The dividend coverage ratio is one of those metrics.

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