3 Warning Signs a Dividend Cut Is Coming, According to Morningstar

Morningstar index strategists have developed a three-signal financial framework to help investors detect companies that may cut their dividends before management makes an official announcement.

According to a report published on 24/7 Wall St., a dividend cut does not announce itself in advance, but the warning signs appear in the financials long before management steps up to the microphone.

The Three Signals

1. Weak Free Cash Flow

The first sign is a persistently low free cash flow, meaning the company is not generating enough cash to cover its dividend payments.

2. High Payout Ratio

When the dividend payout ratio exceeds 100%, the company is paying out more in dividends than it earns, an unsustainable situation.

3. Rising Debt

A high debt-to-EBITDA ratio indicates financial distress that may force the company to cut dividends.

What This Means for Investors

Income investors can use these three signals to screen their portfolios, especially for stocks with stable dividends like Johnson & Johnson (JNJ), Procter & Gamble (PG), and Coca-Cola (KO). Although these are considered safe havens, any warning sign warrants a closer look.