Dividends are not paid with sales, earnings, EPS, EBIT or EBITDA. Instead dividends are paid with cash. As an investor, you want to pay close attention to the cash flow statement. Unfortunately, it is probably the least used and most misunderstood statement.
Ultimately, cash flow is what drives the value of any financial asset. The reason analysts look at revenue, EPS, EBIT, EBITDA and margins, they are trying to estimate the level of cash the company will generate in the future.
Dividends In Downturns
When a company consistently generates more cash than it uses, it is able to increase dividends paid, buy back shares, reduce debt, or acquire other companies. However, as we learned in the 2008-2009 economic downturn, businesses sometimes go through lean times.
When the economy slows, investors in dividend growth stocks not only expect their dividends to continue, but they also expect them to continue to grow. Some companies do it with debt or by issuing shares.
However, some really fortunate companies are able to access the cash from an unusual place… directly from their balance sheet.