How to Avoid Dividend Cuts

01 mins 27 secs

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It’s not just the loss of income, it’s the loss of principal and when you think about it, if I impede my principal, I also impede my ability to generate income.

We look at cash flow from operations first. Dividends have to be paid out of current or retained earnings so -- what is important is the health of the earnings of the corporation, the health of the cash flow. Second thing you can look at is dividend cuts are often tied to credit reviews, where the rating agencies, S&P and Moody’s, are starting to question their ability to pay back that debt and is threatening them with some type of credit review. What is very easy for the corporation to get back to them is this cash outflow called the dividend so what they’re trying to do is protect the bondholders, not the equity holders. The last thing that you can pay attention to is price volatility. When the stock is highly volatile on the way down, that’s probably signaling something to you and you should at least be aware of it. It’s a combination of three things. It really is cashflow coverage of the dividend; it is the health of the balance sheet, so is the company getting into trouble with debt; and the last thing is if you have the first two and you see the stock get highly volatile, you should pay attention.

The views expressed are as of March 2019, may change as market or other conditions change and may differ from views expressed by other Columbia Management Investment Advisers, LLC (CMIA) associates or affiliates. Actual investments or investment decisions made by CMIA and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that any forecasts are accurate.

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Part of a successful dividend investing strategy is avoiding companies that cut their dividends. In this video, senior portfolio manager Scott Davis explains how he identifies those companies that may be likely to slash dividend payments. Davis focuses on three things: free cash flow coverage of the dividend; the health of the company’s balance sheet; and the degree of volatility in the stock’s price.

Contact your Columbia Threadneedle Investments representative at 800.426.3750