With interest rates at all-time lows, income investors have few places to turn for solid yields. To make things even more difficult, the (coronavirus) COVID-19 stock market sell-off has already triggered a handful of companies to cut or suspend their dividends.
Not only do dividend cuts drive away income investors, they're also a sign of potential liquidity issues at the underlying company. The sell-off has driven dividend yields of a number of S&P 500 stocks to their highest levels in years. But as attractive as a double-digit dividend may seem on the surface, a dividend is only as good as the company paying it.
The quickest way to assess the reliability of a dividend is to look at a company’s payout ratio. A payout ratio is a measure of the percentage of a company's EPS that is going back out to meet its dividend payment obligations. Ideally, a healthy dividend stock will have a payout ratio at or below 50%, but anything approaching 100% or higher is often a sign that the payout is unsustainable.
Another red flag for investors to watch for is dividend yields that are too good to be true. A handful of real estate investment trusts and other companies pay yields at or above 8%, but most companies never intend to have yields that high. In many cases, stocks with yields that high have suffered large sell-offs that drove the payouts higher relative to the share price and could also indicate fundamental problems at the company.
Dividends At Risk
Here are eight S&P 500 stocks with dividend yields of at least 7% and payout ratios of above 100%, according to Finviz.
- ONEOK, Inc. (NYSE: OKE), 16% yield.
- Williams Companies Inc (NYSE: WMB), 11.8% yield.
- Newell Brands Inc (NASDAQ: NWL), 7.1% yield.
- AT&T Inc. (NYSE: T), 7% yield.
- Wynn Resorts, Limited (NASDAQ: WYNN), 7% yield.
- Chevron Corporation (NYSE: CVX), 6.4% yield.
- Kraft Heinz Co (NASDAQ: KHC), 6.1% yield.
- Baker Hughes Co (NYSE: BKR), 6.1% yield.
Dividend investors looking for yield should tread very carefully in the market these days. There may be a number of companies waiting until their first-quarter earnings report to announce dividend cuts.
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