Dividend stocks can provide steady cash flow that feels passive, and many retirees use them to create a stream of income to help cover living expenses. A plus is that dividend stocks can produce higher returns than bonds in the long run.
Accumulating enough shares of your favorite dividend stocks to get regular income that covers some of your bills may seem like a dream scenario, but investors must take the right steps to determine which dividend stocks make sense for their portfolio. Picking well can accelerate your returns, while bad selections can actually move you further away from long-term financial goals.
[Sign up for stock news with our Invested newsletter.]
A proper dividend stock analysis goes well beyond the stock price and current yield. You can follow these steps to pinpoint assets that produce enticing cash flow and have long-term growth opportunities:
— Clarify your long-term investment goals.
— Know your dividend investment type.
— Check the dividend payout ratio.
— Monitor the dividend payment history.
— Review year-over-year revenue and earnings growth.
— Assess the stock valuation.
— High-yield stocks and the danger of yield traps.
— Wendy’s stock dividend cut: an unsustainable payout.
Clarify Your Long-Term Investment Goals
Before analyzing any stock and its dividend, investors should make sure they’re clear on their portfolio objectives. Walking into any investment without knowing how it aligns with your long-term horizon can hurt your portfolio.
Matt Mondoux, senior financial advisor at Blue Chip Partners, suggests that dividend investors focus on cash flow. “The aim should be to create a portfolio that pays enough dividends to fund living expenses in retirement. If the lion’s share of an investor’s living expenses is met by dividends, then they will not need to rely on selling shares of stock to fund their lifestyle.”
Know Your Dividend Investment Type
When it comes to dividends, most investors fall under one of two categories: income or growth. Dividend income investors value cash flow over appreciation and growth rates. These investors look for dividend stocks with high yields. Share price appreciation is a nice bonus, but the current dividend is the main focus.
“Dividend income investing focuses on companies that return more cash to shareholders today, while dividend growth investing focuses on companies with the ability to increase those payments over time,” says Tim Thomas, wealth manager at Seattle-based Badgley Phelps Wealth Managers. “For investors, the key distinction is whether more of the return comes from current income or from the future growth of that income.”
Verizon Communications Inc. (ticker: VZ) and PepsiCo Inc. (PEP) are two well-known dividend income stocks that prioritize high yields over market-beating returns. Broadcom Inc. (AVGO) and Alphabet Inc. (GOOG, GOOGL) have much lower yields, but they have long histories of delivering higher overall returns than the S&P 500.
Once you know what you want as an investor, it’s easier to analyze a stock and know how it may fit in your portfolio. Establishing criteria, as Mondoux explains, also eliminates many stocks from your buy list.
“Limiting the pond in which you fish from is another great way to avoid the ‘soup du jour’ investment that likely does not align with your goals,” he says.
Check the Dividend Payout Ratio
Corporations are not obligated to reward shareholders with dividends every quarter. However, investors begin to expect dividends once a company starts giving them out.
Corporations can lose a lot of investors if they stop the dividend, so most companies continue paying dividends if they can. While a significant global or economic event can result in a dividend cut that surprises investors, other cuts are easier to predict.
Investors can look at a company’s dividend payout ratio and dividend history to gauge a dividend’s sustainability. The dividend payout ratio measures the percentage of a company’s earnings that get distributed as dividends.
“Growing companies typically have lower payout ratios since they may be allocating a higher percentage of their income, and more specifically their free cash flow, to investment to grow the company. Older, more stable companies typically have higher payout ratios because returning capital to shareholders is likely their best option to satisfy investors,” Joseph Sroka, the chief investment officer at NovaPoint Capital, told U.S. News.
You can calculate this ratio by dividing the annual dividend per share by the annual earnings per share. So, for example, if a company has an annual dividend per share of $2 and an annual EPS of $5, the dividend payout ratio is 40%.
A 40% payout ratio suggests that the dividend is sustainable. “When you start getting above 70% of the earnings going to the dividend, one has to do some extra analysis to make sure that the dividend is safe,” says Hank Smith, head of investment strategy at Haverford Trust Co.
Keep in mind that dividend payouts are best compared within specific industries and investment types, as they can vary significantly. Master limited partnerships, or MLPs, for example, often have comparatively high payouts, as do real estate investment trusts, or REITs.
Monitor the Dividend Payment History
An effective stock analysis combines multiple components instead of relying on one indicator. As useful as the payout ratio is, it’s important to incorporate other details, like a company’s dividend payment history.
Dividend payment history reveals how often a company pays dividends and how much it raises the dividend. Many corporations increase their dividend each year to reward shareholders and indicate confidence in the business. Some companies in growth mode with strong financials can afford to hike their dividend by more than 10% each year, while other companies have lower growth rates.
Smith views dividend hikes as a critical component of analyzing dividend stocks. “When companies increase their dividend, that is the most tangible statement they can make about their confidence in the current and future fundamentals of their companies,” he says. “Dividends don’t lie. You can’t make them up. It’s not some accounting trick.”
[Read: Best Brokers for Online Stock Trading in 2026]
Review Year-Over-Year Revenue and Earnings Growth
A company’s growth over the years offers clues about a dividend’s stability. Past results do not guarantee future success, but they tip investors off as to the company’s direction. Dividend stocks can continue rewarding shareholders if the underlying company has positive revenue and earnings growth. A company that can consistently grow revenue and earnings by over 10% each year usually has enough room to grow and support the dividend.
Companies with decelerating year-over-year revenue and earnings growth may be at risk of dividend cuts in the future. If a company grew earnings by 20% on an annual basis three years ago, and it reported 5% year-over-year growth in its recent earnings report, it’s worth checking to see if the dividend may soon be at risk.
If net income growth eventually flattens or drops year over year, a company may have to borrow money to maintain the dividend. That’s when a dividend becomes unsustainable and due for a cut, unless the company quickly transforms its fundamentals.
Assess the Stock Valuation
After reviewing the company’s and the dividend’s sustainability, the final step is to look at the valuation. Some dividend stocks have enticing growth rates and high yields that get overshadowed by a lofty valuation.
Investors can use many valuation metrics to assess a stock’s intrinsic value, but most dividend investors focus on the price-earnings ratio. You can arrive at the P/E ratio by dividing the share price by annual earnings per share.
If a company trades at $100 per share and reports an annual EPS of $4, the stock trades at a P/E ratio of 25, or 25 times earnings. If you like the stock but believe it’s overvalued, you can establish a fair price point to buy shares. Investors who believe a P/E ratio of 20 is more reasonable for $4 EPS will have to wait for the stock to trade at $80 or below before buying shares.
When looking at the P/E ratio or any other valuation metric, it’s important to compare the right companies. Using a tech company to gauge if a bank stock is fairly valued can lead to the wrong conclusion since those companies operate in different industries. Market conditions also play a role.
“While dividends can be consistent or growing annually, stock prices fluctuate more than dividends,” Sroka says. “[If] the stock price has declined, and if all other fundamental factors look good, then it may be a smart buying opportunity.”
Investors use valuation metrics to determine if a company is fairly valued, but that doesn’t tell you how an investment will change in the future. Monitoring a company’s fundamentals can help you determine the stock’s long-term potential.
High-Yield Stocks and the Danger of Yield Traps
A stock with a high dividend payout, or percentage yield, might look like a fast way to make extra money, but it can also be risky. A stock’s dividend yield is just the dividend payment divided by its stock price. This means a high percentage often happens because the stock’s price is falling fast, not because the company is doing well.
If a business is struggling, it won’t be able to keep paying that high dividend for long. Eventually, the company may cut its payouts, leaving investors with less cash and a loss on their investment. Financial experts call this risky situation a “yield trap.” That’s why analyzing the underlying fundamentals is so important.
Wendy’s Stock Dividend Cut: An Unsustainable Payout
If a company suddenly stops raising the dividend, the dividend may be unsustainable. A flat dividend may indicate that a company’s fundamentals are not improving to warrant dividend growth, and that can translate into dividend cuts in the future.
In early August, Wendy’s Co. (WEN) cut its quarterly dividend by 50%, from 14 cents to 7 cents, after multiple quarters of declining same-store sales. Wendy’s also made a 44% reduction in the dividend in 2025. These cuts followed over a year of Wendy’s maintaining a flat dividend growth rate amid sluggish sales and declining net income.
The stock’s high yield enticed income investors, but the fundamentals finally caught up with the company. A 7% year-over-year decline in U.S. same-store sales in the second quarter of 2026 didn’t impress investors, and it suggests that dividend cuts may happen more in the future.
More from U.S. News
7 Best Defense Stocks to Buy Now
7 Best Cybersecurity Stocks to Buy
7 Best Semiconductor Stocks for 2026
How to Analyze a Dividend Stock originally appeared on usnews.com
Update 08/17/26: This story was published at an earlier date and has been updated with new information.
