I’ve spent years analyzing dividend-paying stocks, and believe me, nothing is more discouraging than expecting steady income from a company, only to watch them cut their dividend without warning. In my experience, dividend cuts can hinder a long-term strategy, wiping out both immediate income stream and the confidence that dividend investors rely on.
For many of us, dividend investing is the foundation of a reliable, passive income stream. We seek out companies paying dividends, buy the shares, and look forward to collecting regular payments while watching our portfolio grow. But as rewarding as this approach can be, it’s not without its risks. A dividend cut can cause the stock price to collapse and leave you second-guessing your entire investment decision.
That’s why I developed the 5-Second Dividend Test, a quick and effective way to spot dividend cuts before they happen. I’ll show you why dividend growth and stability are so important for long-term investors, how a sudden dividend cut can impact your returns, and why my simple test can save you hours of long and boring research. If you’re ready to protect your portfolio and ensure a steady stream of dividend income, keep reading, the 5-second test starts now 😊.
Does Dividend History Really Matter? Yes, and Here’s Why
Last week, I was chatting with a friend over coffee, and he asked me: “If you could stick to just one factor when picking a dividend stock, what would it be?” My answer is always the same: a steady dividend track record. Let me tell you why.
Let’s compare the dividend histories of Johnson & Johnson (JNJ) and Ford (F).
If you look quickly at these dividend history bar charts , it’s easy to find which one might cut its dividends. If you guessed Ford, you’re correct. This example shows how important it is for a company to maintain reliable dividends. Even better is when those payouts grow every year, that’s a sign of top management that treats shareholder returns as a priority. Of course, no investment is 100 % predictable, but a stable or even better a rising dividend often indicates the company has overcome major events (like the 2008 crisis, 2020 Covid 19 crisis…) without breaking its dividend streak.
I’ve spent so much time researching dividend paying stocks, and this is the factor that stands out above all else when it comes to predicting a company’s ability to steadily pay dividends.That long-term stability offers a foundation, a reminder that short-term dips in stock price don’t necessarily signal trouble for the company’s dividend payout. You see that they’ve carefully managed their cash flow, made prudent capital expenditures, and preserved enough cash to sustain dividends, even in difficult times.
That’s it for this quick check but if you want to go further, I’ve developed a tool that gives each U.S. stock a “dividend cut risk” score. It only takes around 15 seconds to see how likely a stock is to reduce/cut its dividend. For those who want a deeper look, keep reading, and I’ll explain how this calculator works and why it could help you feel more confident in your dividend stocks investing decisions.
Going Deeper: Introducing the Free Dividend Cut Risk Calculator
Let’s say you’re curious about Exxon Mobil (XOM), and you’d like a quick assessment at whether those dividend checks are at risk of getting smaller. Here comes the Free Dividend Cut Risk (DCR) Calculator. This Calculator relies on financial data from Financial Modeling Prep and when you’ll have access to the Nyse/Nasdaq US Stocks DCR Score. Just enter you ticker, and hit “View Chart”. (Please note, that it can take up to 40 seconds to load the data, so please be patient)
Once the data is loaded, you’ll see eight different metrics. There’s a bar chart showing up to 25 years of past dividend payments, the five-year average payout ratio, and other financial stats like debt-to-equity and interest coverage. You’ll also find five- and 25-year growth rates for both dividends and net income (only if the info is available on this 25 year period otherwise it’s less) plus a check for any past dividend cuts. Each metric is graded on a score from 1 (strong) to 5 (weak), and you can tap the info icon on each card to see the score.
After all eight scores are in, the calculator does a little math to turn them into an average. Any stock with a negative five-year dividend growth rate gets another point tacked on, and having at least one dividend cut within 25 years adds three. Finally, the total average score is converted into a percentage and assigned a risk category: 0–20% signals a low threat of cuts, while anything above 80% suggests the company might slash payouts sooner than you’d expect.
Before hitting the “buy’ button on your favorite brokerage app, please remember this tool only uses quantitative data. It won’t catch surprises like unexpected company events or market crashes . That’s why I always suggest using it as a starting point rather than a final decision. Think of it as a way to short list potential stocks without getting lost in numbers. And if you’re really interested in how I calculate each formula, the Excel file shows every step. Combine these results with your own research, and you’ll feel more confident when buying dividend stocks.
Conclusion
That’s it for today, I hope you enjoyed the article and happy with the info you got. If you’re ready for even deeper insight into dividend investing, be sure to subscribe to my newsletter, I will regularly deliver valuable content about dividend stock investing.
