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3 Hefty Dividend Yields to Keep an Eye On

These stocks' big headline numbers aren't quite what they seem

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FirstEnergy185Trailing Dividend Yield: 5.8%
Payout Ratio (based on 2014 earnings): 74%

Looking closer at recent dividend data, FactSet shows that telecom and utilities stocks have maintained the highest payout ratios for the 10th consecutive quarter, with respective ratios of 152% and 62%.

Of course, the telecom sector has suffered from large asset impairment charges, and if you exclude them, the ratio slides to 22%.

Utilities — whose average payout ratio doubles the broader market’s — don’t have a similar excuse. Sure, depreciation often weighs on earnings, but many stocks in the sector are suffering from falling cash flow as well.

One such example: FirstEnergy (FE). The company’s earnings have slipped 8% per year over the past half-decade and are only expected to regain around 2% of that annually during the next five years — one reason its payout ratio is sitting at an above-average 74%.

Beyond that, FE’s annual operating cash flow has been in a downtrend. And as Seeking Alpha’s Rupert Hargreaves explained this summer, the company has been spending most of that cash on capital expenditures, requiring it to borrow to pay investors.

That’s hardly a recipe for a reliable payout going forward.

Article printed from InvestorPlace Media,

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