Five Tips for Buying Cheap Stocks

Tip #4 – Don’t waste your time with dividend-cutters.

The primary reason a company slashes its dividends is that it needs money, and badly. Generally, the business is in the throes of unexpected financial
events that will severely affect its earnings — current or future.

Granted, the current economy and the resulting financial pressure on companies has been unusual, so it’s a little more difficult to separate the
dividend-cutters who were merely trying to nip short-term problems in the bud from those in which the dividend cut is but the first warning of what’s
to come.

Consequently, it’s up to investors to figure out why the cut was made and whether it signifies just temporary or long-term challenges for the company.

To do that, first think about the explanation that management gave for the cut — does it make sense? Next, look at the company’s cash position.
Does it typically run pretty lean? Has it been decreasing over time to an untenable level? And finally, review the earnings trend, again, over a period
of a few years. Are they trending down, or not growing as much as their industry warrants?

In general, a cut in dividends is not a lightning bolt from the sky. Instead, it’s a continuation of bad news that will first show up in cash and
earnings.

NEXT – Tip #5