In a tricky, geopolitically driven environment like the one pushing the market around right now, sometimes it’s just easier to park your idle investment dollars in dividend stocks and forget about out. Once all the dust settles and any impending correction has run its course, investors can start ferreting out growth opportunities again.
But not all dividend stocks are built the same.
Indeed, some of the market’s favorite income-producing investments may be on the verge of dividend cuts or outright dividend suspensions, as business just isn’t good enough to support the continued payout. That’s a problem. Some of these stocks yield considering their mouth-watering high yields are more than enough to draw an unwitting speculator or two.
With that as the backdrop, here’s a closer look at eight dividend names that may sport a healthy dividend yield right now, but that you should avoid at all costs because of the unlikely prospects of maintaining those payouts going forward.
In some cases — too many, in fact — the company in question is already spending more money than it has to spend just to make sure its shareholders remain happy.
Dividend Stocks With Dangerous Payouts: BP plc (BP)
Dividend Yield: 6.6%
It’s been skating on thin ice for a while, dishing out dividend in excess of earnings on hopes/assumptions that oil prices would improve in the near future around the same time its investments in new projects start to pay off. With crude oil prices seemingly content to remain stuck around $50 per barrel though, it doesn’t appear the gamble is going to end well for BP plc (ADR) (NYSE:BP).
To its credit, BP swung to a profit three quarters ago, and has remained profitable since then. It’s just not profitable enough. The quarterly dividend of 60 cents per share it’s paid since early 2015 is still more than it’s earned in any of those recently fruitful quarters.
Unless oil prices move meaningfully higher real soon, the company could end up making a decision not all of its shareholders like.
Dividend Stocks With Dangerous Payouts: Mattel (MAT)
Dividend Yield: 6.8%
With just a quick glance, the dividend yield of 6.9% currently being sported by toymaker Mattel, Inc. (NASDAQ:MAT) makes it one of the better dividend stocks among blue chip names.
Don’t get too excited. Like BP, that payout (on an annualized basis) still exceeds how much the company is earning.
As was also the case with BP, the company remained committed to the payout in anticipation of a turnaround that looks like anything but a sure thing now. Last quarter, the company missed estimates by a country mile, losing 33 cents per share versus estimates for a loss of only 17 cents. Over the course of the past four quarters, Mattel has earned 80 cents per share, yet gave investors $1.52 in dividends during that time.
Former Google Margaret Georgiadis was brought into the fold in January to drive a much-needed turnaround, but in that she’s the third CEO is just a little over two years and has no toy industry experience, there’s not enough assurance she’ll be able to put Mattel back on the track to profit-growth either.
Dividend Stocks With Dangerous Payouts: CenturyLink (CTL)
Dividend Yield: 8.7%
Most of the smaller telecom players have done everything they could to maintain their dividend payouts, even when it hurt to do so. Now that Frontier Communications Corp (NASDAQ:FTR) has bitten the bullet and more than halved its dividend, though, it becomes infinitely easier for other names of its ilk to do the same.
CenturyLink Inc (NYSE:CTL) is the next likely name in that group to follow suit. It has been dishing out as dividends more than it has earned for years now, and while its debt-reduction work is impressive, something has to give soon.
To that end, a management shakeup is looming now that activist investor Keith Meister has gotten involved, who sees untapped earnings-growth potential in CenturyLink now that it’s melding with Level 3 Communications, Inc. (NYSE:LVLT). The question is, can he steer the company in a direction that quickly closes the gap between the 54 cents per share it’s paying out every quarter and what it’s actually earning on a quarterly basis?
The answer is, probably not — at least not soon enough.
Dividend Stocks With Dangerous Payouts: Prospect Capital (PSEC)
Dividend Yield: 12.1%
Business development companies like Prospect Capital Corporation (NASDAQ:PSEC) are funny birds in that their income statements aren’t necessarily a picture of their true financial health. A look at the cash flow is also time well-spent, though even that doesn’t always tell the whole story.
With that as the backdrop, though Prospect Capital is one of the premier names in the BDC realm and boasts an impressive 12% yield, the fiscal math hasn’t worked out in a while. And it fell off a minor cliff last quarter. Income of five cents per share wasn’t even close to the quarterly dividend of 25 cents.
Maybe it’s nothing. But with the cost of capital on the rise now that interest rates are edging higher in addition to shrinking business-development prospects in a somewhat-peakish economy, it’s more of a risk than most investors need to bother taking.
Last quarter’s earnings miss only underscores this possibility.
Dividend Stocks With Dangerous Payouts: Canadian Natural Resources (CNQ)
Dividend Yield: 2.7%
BP is hardly the only energy name to be financially overwhelmed by expenses and merely mediocre crude prices. Canadian Natural Resources Ltd (USA) (NYSE:CNQ) is another one of the dividend stocks in the space that could be shrinking its payout in the foreseeable future.
For perspective, last quarter, Canadian Natural Resource earned C25 cents per share, marking the second consecutive quarter the Canadian oil company was in the black … and that was a “good” quarter. Problem is, it’s pretty well committed to a quarterly payout of C27.5 cents per share.
Throw in the fact that CNQ is interested in making acquisitions that may or may not pan out if oil continues to waffle, and income-seekers are better served by looking elsewhere.
Dividend Stocks With Dangerous Payouts: UDR, Inc. (UDR)
Dividend Yield: 3.2%
For the same reason you don’t want to pass judgment on the income statements or cash flow statements of business development companies without the proper context or perspective, you don’t want to do the same for real estate investment trusts (REITs) either.
Rather, the key metric to watch for a REIT is funds from operations, or FFO.
To that end, UDR, Inc. (NYSE:UDR) — a multifamily-focused REIT that deals in apartment communities — looks healthy enough. Its adjusted FFO of 45 cents last quarter more than covered its dividend of 29.5 cents per share, and in fact, the company just raised its payout to 31 cents. But, between looming interest rate increases and delivery rates that are a bit higher than they should be because the company overestimated U.S. job growth to date, its dividend coverage ratio could start to shrink.
There’s certainly not a lot of room for dividend growth, anyway.
Dividend Stocks With Dangerous Payouts: Weyerhaeuser (WY)
Dividend Yield: 3.8%
If you thought stagnant oil prices were disappointing to owners of energy stocks, try this on for size.
Timber prices have fallen more than 11% since early April, and considering (1) that peak was also where lumber prices topped out in early 2013 right before a big pullback, and (2) last month’s home sales plunged from March’s peak, timber companies and their shareholders have good reason to be nervous. That headwind could further chip away at uncomfortably narrow margins.
In fact, lumber supplier Weyerhaeuser Co (NYSE:WY) doesn’t have any wiggle room to play with. Its steady quarterly dividend of 31 cents per share is more than it has actually earned in any of its past four quarters, and slumping wood prices are only going to exacerbate the problem.
Dividend cuts may be the only viable solution if the worst-case scenario is realized.
Dividend Stocks With Dangerous Payouts: Las Vegas Sands (LVS)
Dividend Yield: 5%
Finally, you have to give credit where it’s due. Casino outfit Las Vegas Sands Corp. (NYSE:LVS) gave it one heckuva try. The top line and bottom line are growing again now that Macau is figuring out how to best operate under tighter regulations. Last quarter, its Macau business posted a thirst straight quarter of progress, and even its Las Vegas properties reported their best quarterly showing since 2008.
The rebound just isn’t happening fast enough.
We’ve now started a third year of per-share profits that are less than the dividends the company is paying out, and its current income trajectory just doesn’t look like it will intercept its dividend tally before the casino giant has to cut something somewhere. Last quarter’s profit of 60 cents per share was respectable, but the dividend of 73 cents ate all of it up, and then some.
And that has been the recent norm.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.