What Makes a Dividend “Safe”? 3 Metrics Every Investor Should Watch

Core Insights - Dividends are a significant factor for investors when purchasing stocks, providing steady cash flow and compounding returns, but high dividend yields may indicate underlying risks [1] - Sustainable dividends require strong financial fundamentals, with no single metric guaranteeing stability [1] Free Cash Flow (FCF) - FCF represents the cash available after a company has maintained its operations and capital assets, crucial for paying dividends and settling obligations [3] - A company with strong FCF can comfortably fund dividends, reinvest in growth, and reduce debts without financial strain; for example, Sheng Siong generated positive FCF of S$78.9 million, or S$0.052 per share, for the first half of 2025, declaring an unchanged interim dividend of S$0.032 [4][5] Balance Sheet Strength - A strong balance sheet is essential for sustainable dividends, with the gearing ratio indicating a company's debt relative to its assets; a lower ratio suggests better resilience [6] - CapitaLand Integrated Commercial Trust (CICT) has a gearing ratio of approximately 38%, below the Monetary Authority of Singapore's ceiling of 50%, and announced a dividend of S$0.0562 per share for the first half of 2025, an increase from the previous year [7][8] Payout Ratio - The payout ratio measures the percentage of earnings paid out as dividends, with a range of 35% to 65% generally indicating sustainability; excessively high ratios, especially over 100%, signal potential risks [10][11] - Companies like DBS Group Holdings Ltd, Singapore Telecommunications Limited, and Keppel Ltd have payout ratios of 56.3%, 71.1%, and 66.5%, respectively, allowing them to reward shareholders while retaining capital for growth [11][12] Conclusion - Investing in companies with sustainable dividends can provide passive income, but it is essential to assess the underlying financial health through FCF, balance sheet strength, and payout ratios [13][15]