How to Avoid Dividend Cuts

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With so many companies having reduced or eliminated their dividends lately, it's well worth the effort to try to figure out which companies have the most reliable dividends. A recent research study from the folks at Charles Schwab could help you feel more confident about your dividend-paying stocks.

The study found that companies with higher returns on equity (ROE) were less likely to cut their dividend and more likely to raise them. Specifically, the lowest-ranking 20% of stocks by ROE were twice as likely to make a dividend cut as the other 80%, while high-ROE stocks boosted payouts at roughly twice the rate as those bottom 20% stocks.

That shouldn't surprise you. If a company has a high ROE, it's probably doing a good job of generating income, and is more likely than low-ROE firms to be able to cover its expenses, including dividend obligations.

So let's see what we can find, shall we, when we screen for companies with sizable dividend yields, solid dividend growth rates, and hefty ROE? Check out these candidates for further research:


Dividend Yield

5-Year Div. Growth Rate


Boeing (NYSE: BA  )




Paychex (Nasdaq: PAYX  )




Kimberly-Clark (NYSE: KMB  )




Automatic Data Processing (Nasdaq: ADP  )




Johnson & Johnson (NYSE: JNJ  )




Norfolk Southern (NYSE: NSC  )




Fairfax Financial (NYSE: FFH  )




Data: Yahoo! Finance. ROE for trailing 12 months.

One word of caution, though. A high debt level can push a firm's ROE higher, which isn't necessarily a good indicator of a strong dividend stock. So cast a glance at debt levels on the balance sheet before drawing any firm conclusions about a company's ROE.

The bottom line is that it's hard to beat the power of dividend-paying stocks. And being able to identify likely candidates that will keep paying dividends is a valuable tool to have.

Learn more:

If you'd like some pointers to promising dividend stocks, grab a free trial of our Motley Fool Income Investor newsletter, which will permit you to see all our recommendations, many of which offer yields north of 8%.

Longtime Fool contributor Selena Maranjian owns shares of Paychex and Johnson & Johnson. Paychex is a Motley Fool Inside Value pick. Johnson & Johnson, Kimberly-Clark, and Paychex are Motley Fool Income Investor selections. Charles Schwab is a Motley Fool Stock Advisor selection. Try our investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.

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