If you rely on dividends for a steady income stream, a dividend cut can really sting. There could be an income shortfall and the stock price could also take a hit. That’s why it’s so important to watch for red flags and stay ahead of the curve.
In this guide, we’ll dive into the reasons behind dividend cuts and arm you with tips to gauge whether your dividends are on solid ground.
Why Do Companies Cut Dividends?
Dividends are a company’s way of sharing profits with loyal shareholders. They’re common among stable, mature companies—especially in industries like healthcare and utilities. Depending on the company, you might receive dividends yearly, quarterly, or even monthly.
But sometimes, companies slash dividends or even stop paying them altogether.
The main culprit? Dwindling profits.
Take Cracker Barrel Old Country Store, which cut its dividend by a whopping 80% in May 2024. The company’s year-over-year revenue has been rising, but its net income dipped 25% and management revised its long-term outlook lower. The stock fell 11% in after-hours trading following the news, creating a lot of pain for shareholders.
On the other hand, Intel cut its dividend by two-thirds in February 2023. The company’s year-over-year revenue fell 14% and its net income fell nearly 80% in 2023. And that followed a 20% and 60% drop, respectively, during the previous year. But in this case, the stock price rose 63% in 2023, showing that you should look at more than just dividends!
It’s also worth noting that even healthy companies trim dividends to free up cash for other ventures. In 2021, Antero Midstream cut its dividend by 27%, unlocking $65 million for new infrastructure. By reinvesting profits, the company dodged expensive debt and its stock price soared from $8.00 in 2021 to nearly $15.00 today.
The point is: Don’t look exclusively at quantitative metrics—the story matters, too.
How to Measure Dividend Safety
The corollary is that numbers don’t lie.
Management can paint a rosy picture, but if the numbers don’t line up, there will eventually be a day of reckoning. And that’s why it’s essential to look for quantitative red flags, too.
Payout Ratios
The dividend payout ratio is the most popular metric to gauge dividend safety. It’s the portion of a company’s net income that’s handed out to shareholders as dividends. So, if a company earns $10 per share and pays a $1 annual dividend, the payout is 10% ($1/$10).
Generally, a good payout ratio is between 35% to 55%. If a company is paying out less than 35%, the yield might not be worth it for income-seekers. But if it’s above 55%, the dividend might be on shaky ground. MLPs and REITs are the exception—their unique business models make higher payouts sustainable over time.
Dividend Growth
Rising dividends often go hand-in-hand with growing profits. For example, a Dividend Aristocrat—a term for companies with 25 years of consecutive dividend increases—like Coca-Cola Co. has grown its earnings by 39% on average over the past seven years. So, it’s pretty likely that these trends will continue moving forward.
When it comes to dividend growth, slow and steady wins the race. Aim for companies that can deliver annual dividend hikes in the 8-10% range. While a big one-time jump might seem tempting, it’s the consistent growers that make it easier to forecast your future income.
Financial Trends
Dividend growth is great, but without earnings growth, it’s a recipe for disaster. In a perfect world, earnings growth should be at least as fast as dividend growth. If dividends are outpacing earnings, it could be a sign that the company is stretching itself too thin.
But don’t just fixate on the bottom line—take a peek at the top line, too. Companies with strong revenue growth and predictable profit margins deliver more sustainable earnings growth than those relying on cost-cutting measures to drive earnings growth. There’s only so much cost that you can cut before it starts really hurting your underlying business.
Risks Beyond Dividend Cuts
The TrackYourDividends Dividend Safety Score takes into account key factors such as the payout ratio, dividend growth history, earnings trends, and overall yield to provide a single, clear assessment of a dividend’s sustainability. That way, you can quickly and easily compare different dividend-focused investment options.
However, dividend cuts aren’t the only potential risk to your investment. If a stock’s price declines significantly, you could experience a loss even if the dividend remains consistent. So, TrackYourDividends also provides quality, value, and trend scores that help you analyze a stock’s fundamental and technical merits.

TrackYourDividends’ Value Score makes it easy to see the metrics that matter. Source: TrackYourDividends
But ultimately, the most effective way to mitigate dividend-related risks is diversification.
By diversifying your portfolio across various stocks and sectors, you can minimize the impact of dividend cuts from any single company or industry.
For example, if you have a significant portion of your portfolio invested in oil stocks and the price of crude oil drops, some oil producers may be forced to reduce their dividends. If your portfolio is heavily concentrated in this sector, you could face a substantial loss of income. However, if oil stocks make up only a small part of your well-diversified portfolio, the impact of dividend cuts in that sector will be less severe.

TrackYourDividends’ Diversification tab provides a helpful breakdown. Source: TrackYourDividends
TrackYourDividends’ Diversification tab provides an overview of your portfolio’s diversification across industries, sectors, and market capitalizations. This information helps ensure that your income stream remains stable even if an entire sector experiences a downturn in profitability. And it’s automatically kept up-to-date as your portfolio changes based on purchases, sales, or changes in share price.
Making Sure You’re on Track
The primary goal for most income investors is to generate a reliable and predictable income. It’s crucial to understand how much income you can expect and when you’ll receive it. This involves projecting income across your entire portfolio and possibly creating a calendar to keep track of payment amounts and dates.
Furthermore, projecting changes to your income over time can be valuable for long-term planning. For example, if you contribute a specific amount to your portfolio each year and expect dividends to increase at a certain annual rate, you can estimate how much income you’ll earn five or ten years down the road.
TrackYourDividends simplifies the process of making these projections without the need to constantly update complex spreadsheets. By inputting your existing portfolio and a few basic assumptions, the platform can help you visualize your annual income growth over time. That way, you can stay on top of your goals and make informed decisions.
The Bottom Line
If you rely on dividends for income, dividend safety should be an integral part of your due diligence—but it shouldn’t be the only thing you consider. A well-rounded portfolio consists of steady companies with solid fundamentals that are unlikely to slash their dividends. And the best investors track and adjust their projections over time.
TrackYourDividends can help you accomplish all of these goals. After connecting your accounts, you can track all your dividend information in one place and leverage a built-in screener to find new opportunities. And best of all, the dividend safety score can help ensure that you’re not at risk for any income disruptions over time.