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Dividends in danger

Q: What should I think if a company pays out more in dividends per share than it has in earnings per share (EPS)?

A: It’s not a promising sign, so you should do more digging into the situation. Imagine a company which has paid out $2 per share in dividends in the past year, but has an EPS of just $1.50 per share over that period.

It may be safe for a while due to its cash hoard (which you can look up on its balance sheet), but no company would want to keep paying more in dividends than it’s generating in cash. That’s not sustainable.

If the company is just experiencing temporary underperformance, the discrepancy might not be a big deal.

But if its troubles are deeper, it’s likely to consider reducing or eliminating its dividend.

Remember, too, that earnings are not the same as actual cash generated. Due to various (legal) accounting practices, EPS can be manipulated.

You’ll often get a better picture of how much cash a company is generating by studying its statement of cash flows.

Dear Fool: WorldCom. Williams Communications. Global Crossing.

I rode two of these on their way up, more than doubling my money, and then rode all of them down to zero.

Buy and hold has its limits.

The Fool responds: You’re right. We like to differentiate between the common recommendation to buy and hold and a sounder variation on it: Buy to hold.

In other words, don’t just buy stock in a company and forget about it for eons. Instead, buy with the aim or hope of holding on for a long time — but keep up with the company’s progress, too, so that you don’t end up blindsided by some troubling development.

Great fortunes have been made by people who hung on to stock in solid companies for decades, through many ups and downs.

With all the attention that computer-related companies such as Apple and Facebook are receiving these days, some have forgotten about or have written off Microsoft (before this past week’s run-up in the stock price).

It deserves some consideration, though.

Sure, there are valid reasons to worry about its future.

It was late to the mobile scene, and few people even know about its app store.

Perhaps worst of all, the PC market, where Microsoft has long been the dominant operating system, is ailing as consumers flock to tablets and other mobile devices.

Still, there’s a lot to like about Redmond-based Microsoft.

It’s digging deeper into the cloud-computing and gaming realms, with its Windows Azure cloud platform and its new Xbox 720.

Microsoft’s Surface tablet’s market share is growing, too.

Its Windows Blue (a Windows 8 revision) is in the works, and Microsoft remains a major force in business computing.