That Dividend Stock Is A BIG MISTAKE (5 Warning Signs)
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Here in the newsletter, we talk a lot about which stocks to buy and what to look for in a great investment. But this week, I want to flip the script and shed some light on five things you want to avoid when hunting down your next dividend stock.
1. Declining or Stagnant Sales
Revenue is the lifeblood of any business. Without consistent sales growth, there’s only so long a company can keep from going downhill.
With that said, it’s normal for a business to hit a rough patch every once in a while. But when a company’s revenue is shrinking year after year like we’ve seen with Whirlpool (WHR), that’s a sign of a much bigger problem.
Source: Snapstock
As we can see, sales have been trending downward almost every year since 2017, which tells us that for one reason or another, people aren’t as interested in buying products from Whirlpool. And due to the length of this decline, this seems like more than just a temporary dip.
To their credit, the company has still managed to grow free cash flow during most of that stretch, but that can only last for so long. There’s only so much cost-cutting and operational efficiency you can squeeze out before you’re all out of options.
Long story short, you want to look for companies that are growing their sales and increasing their customer base—not the other way around.
2. Falling Earnings and Free Cash Flow
At the end of the day, dividends are funded by the actual cash that’s generated by the business. If profits and free cash flow are falling, it calls into question the safety of the dividend.
Intel (INTC) is a textbook example. Over the last few years, their earnings and free cash flow have absolutely cratered (to the point where they’re actually losing money) as the business has struggled to play catch-up in the cutthroat semiconductor market.
Source: Snapstock
Eventually, these losses forced their hand. In 2023, they slashed the dividend by more than 50% (I’m sad to say that I was on the receiving end of that one). And by late 2024, they ended up suspending the dividend altogether.
Although it’s always sad to see a company cut their dividend, the move for Intel totally made sense.
If the company isn’t generating any profits or free cash flow, there’s no way they can possibly afford to keep paying dividends to shareholders. Cutting the dividend is like cutting off the arm to save the body.
Nonetheless, you want to try to avoid companies that find themselves in that position. Similar to the revenue, you want to invest in companies that have the ability to grow their earnings and free cash flow over time.
3. Declining Margins
Margins can tell you a lot about the underlying health of a business. And when they’re heading in the wrong direction, it can be a sign of all sorts of bad news.
When margins are falling, it usually means costs are rising faster than revenue—or the company is being forced to sell their products for lower prices. This indicates that they don’t have any pricing power, which could mean that the company has no moat.
FAT Brands (FAT) is a great case study. I love me some Fatburger, but the company’s gross margins have definitely suffered as their cost of goods sold continues to eat up more and more of their revenue.
Source: Snapstock
Beyond the gross margin, net income and free cash flow margins have both gone negative, which brings us back to the earlier point: if the business isn’t making any money, it can’t pay a sustainable dividend.
Unfortunately, that has proven to be true with FAT Brands. Earlier this year, the company suspended their dividend, which is no surprise considering the free cash flow has been negative since 2020.
Even beyond the dividend, these things are all indicative of a low quality business. Why would you want to invest in a company whose financial situation only seems to deteriorate?
Great businesses don’t do that. Great businesses get better with time, and those are the only kind you want to invest in.
4. Rising Payout Ratio
As a dividend investor, you’re probably already very familiar with the payout ratio. In case this is your first time hearing about it, the payout ratio essentially tells you how much of a company’s net income or free cash flow they are paying out in dividends.
A rising payout ratio means the company is paying out more and more of its profits to maintain the dividend—and there are only two reasons this happens:
Either the earnings and free cash flow are declining, or the dividend is growing faster than the earnings and free cash flow. Either way, a rising payout ratio isn’t sustainable.
We can look at Campbell’s Soup Co. (CPB) as an example. Back in 2020, their payout ratio was only 26%. But by 2024, it had jumped to nearly 80%.
Source: Snapstock
They haven’t cut the dividend yet, but if that trend continues, it’s not hard to imagine a scenario where they’ll have no other option but to cut it.
5. A History of Cutting Dividends
As a dividend investor, you want to invest in companies that are paying you more income over the years—not less. And there are quite a few companies out there that have bad track records of reducing their dividends again and again.
Orchid Island Capital (ORC) is a perfect example. The yield is consistently in the double-digits, which reels a lot of investors in. But unfortunately, that yield is so tantalizing that it blinds investors from the fact that ORC has historically cut its dividend almost every year.
Source: Snapstock
Like I said earlier, the bottom line is that you want to invest in companies that will grow your income over time—not shrink it, no matter how high the yield is.
Closing Thoughts
At any rate, these are just a few of the red flags I personally look out for when researching dividend stocks. While these may not always result in a dividend cut—or in you losing money on the investment—more often than not, they’re signs of deeper problems within the business that it, and its shareholders, will eventually have to face.
With that said, now I want to hear from you: What are some warning signs you look for when researching stocks? Write to me here and let me know.
And if you want to learn about a few stocks that I think could be next to cut their dividends, check out this video here.
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New Investors ALWAYS Make This MISTAKE | Ep. 25
In this episode of The Deep End, we talk about one of the biggest and most common mistakes new investors make: not thinking through where they’re investing.
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SINCE YOU ASKED 💬
"What's been the toughest break for you this first half of 2025? Anything you wish you did or didn't do?"
- X-Dividend Dad | YouTube
To be honest, I feel like 2025 has been pretty tame. I’ve only made a couple of notable moves in the portfolio so far.
First off, I started a new position in Zoetis (ZTS) a couple of months ago, which I feel really good about. I think Zoetis is a high-quality company, and I bought in at a pretty decent price after the stock had pulled back. We’ll see how it plays out over time, but so far, I like the setup.
The only other notable move I made was selling out of Altria Group (MO). I talk more in-depth about why I sold it here, but I also feel really good about that decision. I’d owned Altria for around five years, so it was a tough one to let go of—but I made a solid profit on the position, and I think the reasoning behind the move made sense.
Outside of what’s happened in 2025, there’s one recent move I think I could’ve handled better—and that was my entry into Clear Secure (YOU). I started the position late last year after the stock had already seen a pretty big run-up (you can learn more about that here), which is probably where I went wrong.
Not long after I started buying, the share price started pulling back. So I’ve been sitting on a loss pretty much the entire time I’ve owned it, which is pretty bittersweet.
On the bright side, I’ve been adding more as it’s dropped, which has helped bring down my average cost per share and reduce the losses. But still, it probably wasn’t the most disciplined entry, and I could’ve been a bit more patient before jumping in.
All in all, I still think Clear is a great company—and it’s growing like a weed. I think I’ll be fine in the long run, but I can also see how I could’ve approached that one a little more thoughtfully.
Have a question? Ask me here to see it featured in an upcoming newsletter.
