What Is Dividend Investing?
A high dividend yield can mean a healthy company paying you back. It can also mean a dying business handing out its last cash. The tests that tell you which you're looking at.
What makes a sustainable dividend stock
| Test | Healthy | Warning sign |
|---|---|---|
| Payout ratio | Below 70% | Above 80-90% |
| Dividend history | 10+ years uncut | Recent cuts or freezes |
| Dividend growth | Rising each year | Flat or falling |
| Yield vs sector | In line with peers | Much higher than peers |
| Free cash flow | Covers the dividend | Funded by debt |
A high yield without these tests is usually a dividend trap, not a bargain.
Key takeaways
Dividend investing involves buying stocks that pay regular dividends, providing income without relying on stock price appreciation.
Dividend yield is a key metric to compare income potential across stocks, but it should not be the only factor considered.
Yield on cost measures income relative to the original investment price, which helps in assessing long-term returns.
Good dividend stocks often have a consistent payment history, growing dividends, sustainable payout ratios, strong cash flow, and a defensible business model.