High-yield dividend stocks are great when the payouts are reliable and the shares of these stocks are moving higher. But more often than not, a high dividend yield isn’t necessarily an indication of reliable income potential, but a company that’s in trouble.
That’s why investors need to look at the numbers — particularly dividend payout ratios.
Think of it this way: If a company earns $3 in earnings per share and pays $2 in dividends per share, you can have confidence that your payout is sustainable. Conversely, if the company only earns $2 per share but pays out $3 per share in dividends, the math simply doesn’t add up.
There are short-term ways for companies to make ends meet for a while, and if profits move higher they can eventually find a way to support that dividend in the long-term.
But it should always be a red flag if a dividend stock is paying out more in dividends than it’s generating in profits. That’s because one way the situation can resolve is for profits to move higher, but the other more disturbing way is for that dividend to be cut or eliminated if things don’t improve.
There’s a chance that each of the following dividend stocks may get their act together. But any investor who owns these picks or is thinking of investing in them for the income needs to acknowledge that their dividends are dangerous indeed right now.
Dangerous Dividend Stocks: Chevron Corporation (CVX)
Market Cap: $180 billion
Industry: Oil & gas
Current Dividend Yield: 4.6%
Current Dividend Payout Ratio: 280%
YTD Performance: +5%
Chevron Corporation (NYSE:CVX) is an energy powerhouse, no doubt about it. However, the simple math regarding its fiscal 2016 dividends are enough to give investors serious reason to question its payout potential.
Thanks to weak oil prices, Chevron’s dividend is now almost three times projected EPS. Sure, if cost-cutting pays off and if oil prices stabilize, CVX could be running at a “better” payout ratio next year, but that still may suck up every penny of 2017 earnings too.
That — and the continued possibility of low oil prices — puts this dividend very much at risk.
Dangerous Dividend Stocks: Las Vegas Sands Corp. (LVS)
Market Cap: $41 billion
Current Dividend Yield: 5.6%
Current Dividend Payout Ratio: 118%
YTD Performance: +17%
Las Vegas Sands (NYSE:LVS) was a hot commodity in 2013 on big hopes for its growth in China’s gaming mecca of Macau. However, the slowdown in China coupled with the big debts LVS ran-up to open these properties have conspired to put serious pressure on this casino stock.
But amazingly, LVS just boosted its dividend plan to $2.88 across 2016 despite projections of just $2.45 in earnings per share this year.
Considering that China is not showing signs of recovery and even 2017 forecasts don’t have Las Vegas Sands covering its juicy payout in full, investors shouldn’t take this dividend for granted.
Dangerous Dividend Stocks: BHP Billiton Limited (ADR) (BHP)
Market Cap: $66 billion
Industry: Iron and copper mining
Current Dividend Yield: 4.7%
Current Dividend Payout Ratio: 128%
YTD Performance: +4%
Mining giant BHP Billiton Limited (NYSE:BHP) has been brutalized by weak metal prices in recent years, and its share price and dividend reflect that.
The company has irregular payouts twice a year, and its first distribution just a few days ago was 32 cents — slashed to roughly a quarter of what it was a year ago.
Investors should expect continued declines in dividends, too, given that even if BHP matches that payout this fall, that’ll come to 64 cents — which is more than the 55 cents it’s projected to earn this year.
Until commodity prices rise, this dividend is at big risk and likely will not move higher.
Dangerous Dividend Stocks: Mattel, Inc. (MAT)
Market Cap: $12 billion
Current Dividend Yield: 4.5%
Current Dividend Payout Ratio: 108%
YTD Performance: +23%
Toymaker Mattel, Inc. (NASDAQ:MAT) has struggled mightily in recent years to keep up with evolving consumer tastes. And while there are high hopes that will change thanks to efforts like a new variety of Barbie body types including “curvy” and “petite,” the numbers show that investors need to understand this isn’t just fun and games for Mattel.
With a quarterly dividend that is currently more than fiscal 2016 earnings per share forecasts, Mattel needs to put together some good performances, or else that payout is in danger of rolling back.
Dangerous Dividend Stocks: Lamar Advertising Co (LAMR)
Market Cap: $5.8 billion
Industry: Media & advertising
Current Dividend Yield: 5%
Current Dividend Payout Ratio: 99%
YTD Performance: +13%
Lamar Advertising (NASDAQ:LAMR) is pretty well-known for its outdoor advertising on roadside billboards, bus shelters, park benches and other easily visible sites with captive audiences.
Unfortunately, billboards are not really a growth business.
Sure, Lamar recently acquired some 5,500 billboards from Clear Channel Outdoor Holdings, Inc. (NYSE:CCO) to help numbers move higher in the short-term, but buyouts like this are really the only path to substantive growth. And considering its earnings per share are almost exactly equal to the dividends paid per share, something is going to have to give — particularly if forecasts based on the Clear Channel acquisition prove to be overly optimistic and Lamar falls short.
Dangerous Dividend Stocks: Potash Corporation of Saskatchewan (USA) (POT)
Market Cap: $15 billion
Industry: Agricultural chemicals
Current Dividend Yield: 5.4%
Current Dividend Payout Ratio: 98%
YTD Performance: +7%
Potash Corporation (NYSE:POT) has been under significant pressure ever since a major Russian competitor undercut the prices for agricultural chemicals around the world by flooding the market with supply and engaging in a price war back in 2013. The result has been constant profit pressures for producers including Potash.
The Canadian company is down a staggering 70% in the past five years, but had been steadily increasing its dividend across that time anyway — up until late January, when the company slashed its dividend to $1 annually.
However, even that payout is dangerously close to the $1.02 in projected earnings for POT this year, and profits will only remain under pressure in 2016 yet again.
Dangerous Dividend Stocks: AllianceBernstein Holding LP (AB)
Market Cap: $2.2 billion
Industry: Investments and asset management
Current Dividend Yield: 8.3%
Current Dividend Payout Ratio: 106%
YTD Performance: -7%
AllianceBernstein (NYSE:AB) provides research, investment management and other financial services. Market headwinds in 2008 brutalized the company, and it had been making efforts to turn things around in recent years.
However, volatility has returned even as AB looks to get back on its feet. The company has been generous with dividends throughout the turmoil in hopes of keeping investors content, but anemic earnings are making it hard to keep those payouts coming at their current rates.
Dangerous Dividend Stocks: Six Flags Entertainment Corp (SIX)
Market Cap: $5 billion
Industry: Resorts and entertainment
Current Dividend Yield: 4.4%
Current Dividend Payout Ratio: 130%
YTD Performance: -3%
Six Flags (NYSE:SIX) is famous for its regional theme parks, including 16 locations in the U.S. and one each in both Mexico and Canada.
Consumer spending has been pretty decent lately, but earnings growth has been terribly inconsistent, and earnings levels remain far lower than 2010 levels. At the same time, the dividend has marched steadily higher in recent years to appease investors.
That may make SIX dividends unsustainable at the current level.
Dangerous Dividend Stocks: TFS Financial Corporation (TFSL)
Market Cap: $5 billion
Industry: Regional banking
Current Dividend Yield: 2.3%
Current Dividend Payout Ratio: 153%
YTD Performance: -9%
TFS Financial (NASDAQ:TFSL) is the holding company behind the Third Federal Savings and Loan Association of Cleveland.
The Rust Belt economy hasn’t exactly been booming, but TFS recently got regulatory approval to reinstate its dividend and increased those payouts in short order. Some investors went ga-ga over the stock in the past few years, and the long-term performance of TFS Financial is pretty good as a result.
But the bottom line is still the bottom line, and a cyclical stock like TFSL could be risky — particularly since it’s paying out so much more in dividends per share than earnings per share.
Dangerous Dividend Stocks: Agnico Eagle Mines Ltd (USA)
Market Cap: $8 billion
Industry: Gold mining
Current Dividend Yield: 0.9%
Current Dividend Payout Ratio: 1,600%
YTD Performance: +37%
Gold prices have moved higher in 2016, and that has led to a rally for miners like Agnico Eagle Mines (NYSE:AEM). However, the miner is banking wholly on higher gold prices to support its operations and its dividend.
Consider that fiscal 2016 earning are set to be just 2 cents a share according to Wall Street estimates, but Agnico is planning on paying out 8 cents per share in dividends this month — less than the 11 cents it paid last quarter. And AEM isn’t shy about reducing dividends in weak environments, including a drop from 22 cents quarterly in 2013 to 8 cents to start 2014.
Sure, the yield isn’t that large, so investors may not miss the payout if it’s cut further. But simple math shows a dividend at serious risk here.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.