Thursday, October 10, 2013

Analyzing the Safety of a Dividend

safeThe term “safe” is a relative one. Most people feel safer in their car than on an airplane even though statistics clearly prove the plane is a safer way to travel. Some people don’t feel safe sleeping in an isolated cabin in the woods but have no problems walking down a city street at night. A person’s feeling of safety is defined by their past experiences and observations which determines their own personal comfort within a situation. The same goes for a person’s definition of safe when deciding on making an investment.

My Grandmother was a child of the Great Depression. She has led a sheltered life and is very careful with her money. I have had no luck trying to convince her that CDs are not a very good investment for generating income. She doesn’t care, she knows they are “safe” as they are FDIC insured. She does not understand that her one year CD earning 1% is actually losing money when you include the effect that the current rate of inflation has on her investment.
Dividend Safety Analysis

In today’s low interest environment prudent investors have turned to dividend stocks to provide them with the income they need. But if someone is investing for the purpose of dividend income, how can they assess the “safety” of that current dividend payment. I have been working on a way to analyze a company’s current dividend and assign a value to the safety of that dividend payment based on financial metrics. This is by no means and end-all be-all way of fully determining a company’s ability to pay its dividend, but it should help shed light on its strengths and identify any potential weaknesses that should be looked into further. Below are the metrics I will look at and the point values assigned to each. READ MORE

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