What are we looking for?
Dividends at risk from companies part of the S&P 500 index.
The screen
We searched the S&P 500 for companies offering relatively high – but at risk – dividend yields. Specifically, we're looking for:
- A dividend yield of 2 per cent or greater;
- A dividend payout ratio (dividend per share divided by earnings per share) of 100 per cent or greater, or negative. (A negative payout ratio is a bad sign: It means the dividends are fully financed by existing cash, debt, new share issue);
- Negative free cash flow to capital. This ratio gives a sense of how well the company uses the invested capital to generate free cash flows, which could be used to stimulate growth, pay and/or increase dividends, reduce debt, etc. A negative figure raises a red flag.
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More about StockPointer
StockPointer is a fundamental analysis tool based on an EVA (economic value-added) model to quickly and easily identify investment opportunities. In addition to providing detailed reports on more than 6,500 companies (Canadian and U.S. stocks and American depositary receipts), StockPointer also allows investors to create personalized filters and build custom portfolios.
What did we find?
Some 36 companies from the S&P 500 (roughly 7 per cent of the index) pay dividend yields of 2 per cent or more while also showing dangerous payout ratios. An even more dangerous aspect of these stocks is their attractive dividend yields. While all these stocks yield more than 2 per cent, and some yield more than 4 per cent or even 5 per cent. Investors looking for high income could be very tempted to add one of these companies to a dividend portfolio, but the risky metrics associated with them tell you all these dividends could at some point get cut, or even completely disappear.
The negative free cash flows mean there is more money coming out of the company's pockets than coming in, which really squeezes the capacity not only to increase the dividends but also to maintain them.
Investors are advised to do additional research prior to investing in any of the companies mentioned.
Jean-Didier Lapointe is a financial analyst for StockPointer at Inovestor Inc.