Watchout for Dividends at Risk on High Dividend Stocks

There is one particular risk that comes into play when investing in high dividend stocks. It is in no way a reason not to invest in them, but is something that an investor must be aware of to be a successful investor. It is called the dividend payout ratio.

To assess if a company's dividend is at risk, you need to look at the dividend payout ratio. The dividend payout ratio is defined by Investopedia as:

The percentage of earnings paid to shareholders in dividends

What I look for is a trend over time of the payout ratio. If a payout ratio is consistently high at 60%, then I do not believe an investor needs to worry about it. But if it has been consistent at 60%, and then jumps to 90% then more research is definitely needed and that companies dividend may be at risk.

This is especially important when you are looking at high dividend stocks. These companies have higher than average dividends and an extra bit of caution needs to be taken to ensure success.