Please explain why, if the market prices the shares of that company at $10/share, there is a greater risk of a dividend cut, or a share price cut, then if the market prices those same shares at $20/share?

If the price drop from $20 to $10 is due to an overall market decline there may be a lengthy time delay before the dividend cut. IOW, the price drop is due to market risk...not business/sector risk or specific issue risk. Investors are likely undervaluing all stocks until the market works it way through the problem. (This is frequently referred to as good volatility, because it presents a good buying opportunity.)

If the price move from $20 to $10 is due to problems with the company or the sector (recently financials) pressure will be applied to reduce the payout ratio so more earnings can be retained for use in turning the company around. (This is bad volatility for the individual issue. Also, some good companies in the troubled sector may see their price decline due to sector concerns...for those good companies this would still be good volatility.)

Most investors want growth and income from their dividend stocks, and they want both to be as secure as possible. The only way the dividend can be secured for the long term is by making sure a portion of earnings is retained for future earnings growth. Future earnings growth provides price appreciation, dividends, and dividend growth. 

Yield is generally only meaningful when you're buying. Obviously, if the yield drops and there's been little price movement then the dividend has been cut...possibly a problem requiring further investigation.

A retiree taking all dividends as income locked in his yield years ago. 

Ken,

"If the price drop from $20 to $10 is due to an overall market decline there may be a lengthy time delay before the dividend cut."

Or the dividend may not be cut!

Asked a different way, WHY would a company cut it's $1/share dividend whenever the market prices it's shares at $10, but not whenever they are priced at $20?

"IOW, the price drop is due to market risk...not business/sector risk or specific issue risk."

Stats said the risk was a dividend cut, not a share price drop.  Actually, the share price drop risk is GREATER whenever the shares are priced at $20 then whenever priced at $10 (reversion to mean arguments).  So this company is riskier, at 5% yield then at 10% yield!

"If the price move from $20 to $10 is due to problems with the company or the sector (recently financials) pressure will be applied to reduce the payout ratio so more earnings can be retained for use in turning the company around. (This is bad volatility for the individual issue. Also, some good companies in the troubled sector may see their price decline due to sector concerns...for those good companies this would still be good volatility.)"

If my aunt had gonads, she'd be my uncle!  8-))

Seriously, a company will cut it's dividend for any number of reasons, but I see no reason to do so simply because it's percentage yield is 10%!  Remember, I'm talking cause and effect.  Cause is 10% yield, effect is dividend cut, all else equal.

"The only way the dividend can be secured for the long term is by making sure a portion of earnings is retained for future earnings growth."

No, not true.  A dividend is secure if earnings are stable, that is, neither growing or shrinking.  The point is that you don't need earnings growth.  You DO need earnings growth for dividend growth and share price growth, just not for the dividend itself. 

"Future earnings growth provides price appreciation, dividends, and dividend growth."

Almost.

Ken,

Perhaps it's only me, but I reacted very negatively to your post:

 As an investor gets older it's probably ok to tilt more toward yield, the long term is becoming less of an issue so give me my money now. Sort of like the AA shift from stocks to bonds as one ages, supposedly.

 I felt it was exceedingly patronizing.  You're telling me the long term is less of an issue but retirement planners are telling me to plan for 30 years of retirement.  In terms of give me money now, guess what I'm living on.  We keep telling you that withdrawal is different from accumulation.  It's like dieting.  Trying to gain weight, when you need to, is as difficult as trying to lose weight, when you need to, but they both involve food.

Stats,

In many ways, you're falling into the same trap that Ken is and generalizing and demonizing high yield.  El talks about the quality of the dividend and the company..  Copie and I talk about cash flow and money management and Bill talks about total return.

I did some numbers this morning, trying to look at this from different viewpoints.  I just used some stocks and funds that are frequently discussed here and am well aware that  there are inequality issues.  They are presented in the order they popped into my brain.

stock/fund                        yield                   10 yr growth of 10k

O                                     6.74%                 $37,051 

SO                                   4.56%                 $34,048  

GE                                   3.83%                 $14,542

JNJ                                   2.76%                 $21,451 

VWELX                             3.27%                 $20,349

ACAS                              12.71%                 $31,408 

DODGX                             1.52%                  $25,479

JAVLX                                0.19%                 $22,501

CSRSX                               2.53%                 $32,826

I recognize that this has been a period where small cap, value and real estate dominated.  A different time frame would have given different results on the total return but that goes into diversification and sector rotation.  Besides, it was easier to just grab the last 10 years.

Roberta 

Fixed earnings don't last very long.

You have to deal with higher prices for equipment, salaries, etc. Without earnings growth the fixed dividend is going to be in jeopardy.

Roberta... I am not trying to demonize high-yield... but I am suggesting caution.  I think portfolios should hold some high yield.

My point is simply that higher yield stocks have greater chance the dividend will be cut.  That is all.

The investments you list are all excellent... and the risk of a dividend cut is different each. 

ALD, which we own, and ACAS have double digit yields.  Their dividends seem safe for now but there is worry of cuts next year.   O, which we own, is dealing with bankruptcy of two of its tenants and its dividend was suspect for a time earlier this year, but they seem to have handled that situation.  I think it is very unlikely that JNJ or GE are going to cut their dividend

Stats

I'm not demonizing HY, and I ain't falling into a trap either.

The bottom line is the long term security of the dividend. Companies have different ways of approaching this, if you feel you've studied your HY stocks and you're content that the div is secure that's great...that's the way it should be.

However, HY can be its own undoing. This can be so because not enough earnings are being pumped back into the company for earnings growth. 

So, from JP...

Room to grow. A company that has little or no prospect for earnings growth over the long run might have maxed out its ability to pay dividends already. The next change in the firm's fundamentals might well be for the worse.

From his current M* article. 

I don't disagree with you all either.  It's individual selection; it's part of the fundamentals of looking at a purchase, whether it's an individual stock of a fund.  There's a big difference between a fund like white oak growth and dodge and cox.  High yield is just one of many things that need to be looked at.  Why are you buying it, what role does it have in your portflio, etc., yabba dabba do?

Roberta 

Ken,

"However, HY can be its own undoing. This can be so because not enough earnings are being pumped back into the company for earnings growth."

For the umpteenth time, this means a high dividend payout ratio, NOT high yield!!!!!!!

A company paying a 2% dividend, with a payout ratio of 90%, is riskier then anothe