John Heinzl of the Globe and Mail writes about dividend stocks for the paper and at the end of June, he focused on a company called Corus. The company owns radio stations and TV programming. The company yield was 18% and has been reduced to 4% or from $1.24 to 24 cents as expected the stock declined. What lessons can be learned? Mr. Heinzl has a few:

Use Your Common Sense

If it seems to good to be true, it probably is. If the yield of a Treasury bill is closer to 0 and the yield on the stock is double digits, the yield on the stock will not last long. Part of using your common sense is being skeptical.

Read Between the Lines

If a company is preparing to cut its dividend, it often gives clues. For example we are committed to this fiscal year’s dividend. They do not say anything about next year.

Study the Dividend History

Companies can not afford to cut their dividends out of the blue. They typically stop raising the dividend after years of increases. The payout is the same, why?

Watch the Financials

For dividends to be sustainable, the company must make a profit and have the cash flow to pay dividends. If cash flow goes down, the sale of assets can make up for one year, but look further down the road at revenues, earnings and cash flow.

Pay Attention to the Payout Ratio

How much does the company payout in dividends compared to their piers. The piers are the ones they compare themselves to when deciding on executive pay. If they are above the companies they compare themselves ask why?

Stay in the Loop

For companies which you have significant resources invested in, you can listen to or read conference call transcripts and investor presentations to allow you to sleep better in the evening.

Linking to dividend paying stocks, if you invest in them the main reason is the dividend which increases your total return. Over the long term, companies which pay a dividend stocks will rise and you will be wealthier. Your task is to set up reasonably simple indicators to see if you wish to continue to hold or look for alternatives. We have all followed companies or industries which we think are wonderful only to find the individual company is not that great. Use the simple indicators to ensure your dividend is safe and then you can determine if the stock is still a keeper.

There are more questions than answers, till the next time – to raising questions.