Q: Why did GE cut its dividend?

Company will save more than $4 billion per year

A: General Electric cut its dividend in half in order to save money. The company hasn’t been making enough money to cover its dividend recently, and the cut will save GE more than $4 billion per year. GE’s free-cash flow has declined for six years in a row, so cost-cutting measures become necessary.

There’s no way to predict with 100% reliability whether a company will be able to maintain or grow its dividend payments in perpetuity, but there are a few things that can indicate your dividends might be in trouble.

The most important dividend-related metric to know is the payout ratio. This is simply a stock’s dividend, expressed as a percentage of its earnings. For example, if a stock pays 50 cents in dividends this year and earns $1, its payout ratio is 50%. A payout ratio of 60% or less is generally considered healthy, and 100% or more implies that the stock isn’t earning enough to pay its dividend.

In GE’s case, the company was paying out dividends at a rate of 96 cents per year, yet it had earned only 86 cents per share over the past year. This is a payout ratio of 112% and was a clear sign to GE’s investors that the dividend might be unsustainable.

Other warning signs include declining earnings or free-cash flow, a debt load that is rapidly increasing and a history of previous cuts during a recession. If any of these apply, there’s a strong chance that your dividends could be in danger — especially if the stock has a high payout ratio.