By Ian Salisbury

In a rocky market dividend cuts are all too common. Yield-hungry investors need to check whether cash flow and earnings are enough to cover attractive seeming payouts.

On Wednesday, kitchen and laundry stalwart Whirlpool suspended its $90-cents-a-share quarterly dividend, after reporting a difficult quarter thanks to what executives called a recession-level industry decline.

Whirlpool isn't the first high profile company to slash its payout this year. Chemicals company LyondellBasell Industries, once the highest yielding company in the S&P 500, cut its payout by 50% in February. Dow, a rival chemical company, slashed its payout in 2025.

All in all around 75 U.S. companies paid a lower annual dividend in the past 12 months, than in the 12 months prior, according to Morningstar. It is worth noting some of these are investment companies whose shareholders don't necessarily expect steady payouts.

So how can investors check if their dividends are safe? Ultimately, the only way to be really sure is to know the company inside and out. But there are a few rules of thumb you can use to start your research.

The most obvious one is to look at the dividend yield. While stocks that boast fat yields seem tempting, a high yield is typically the result of a depressed stock price, signaling financial trouble.

Right now the average yield on the S&P 500 is just 1%, near historic lows. That means a yield of 4% or 5%, which might have been common a decade ago, often signals a distressed company.

Currently only 25 companies in the S&P 500 have yields of 5% or more, according to FactSet. Of those only about half are expected to grow earnings this year. In other words, a 5% yield doesn't necessarily suggest a cut is coming, but it is definitely a reason to check for problems.

The next item on your list should be the dividend payout ratio. This figure measures the share of a company's net income that gets spent each quarter in dividend payouts. In general, anything over 80% to 90% is considered questionable, since it means there is little room for error and the company is more focused on payouts than growing its business.

The median payout ratio for all dividend paying stocks in the S&P 500 is around 37%, according to FactSet. Whirlpool's payout ratio would have been about 120%, based on its latest earnings, if it hadn't suspended its dividend Wednesday. LyondellBassell's spiked above 100% in late 2024, before the company started posting quarterly losses in 2025, sparking widespread concern a cut was imminent.

Of course, even if a company has reasonable yield and earns enough to comfortably cover the payout, that doesn't mean they will do so going forward.

The easiest way to do this is to look at earnings forecasts by sell side analysts. Investors should always take those with a grain of salt. Wall Street analysts typically overestimate actual earnings by two to 3 percentage points a year, on average, according to DataTrek research. It isn't uncommon to see analysts move in unison to slash forecasts after a bad quarter. Nonetheless, their estimates serve as a useful read on Wall Street's conventional wisdom about a company.

Want the real answer on where a company's earnings are headed? Well, that is when dividend investors need to download the 10-K and sharpen their pencils.

Write to Ian Salisbury at ian.salisbury@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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May 08, 2026 14:04 ET (18:04 GMT)

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