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What are we looking for?

Stocks or units that appear to have risky dividends or distributions.

More about today's screen

We looked for the best Canadian dividend stocks last week based on dividend growth and strong cash flow. This week, we'll ask Morningstar CPMS to create a screen to look for dividends or distributions that may risky.

Morningstar CPMS senior consultant Craig McGee created a screen for the following criteria:

-Market cap greater than $250-million

-Payout ratio using expected dividends and 2012 expected earnings per share greater than 100 per cent

-Payout ratio using dividends and EPS from the past five fiscal years greater than 100 per cent

-Negative 2012 cash flow estimate revisions over the past 90 days

-Negative three-year annualized growth rates of cash flow and sales

-Negative trailing four quarters of free cash flow

-Debt/cash flow ratio greater than one

-Quick ratio (current assets minus inventories divided by current liabilities) less than one

More about CPMS

CPMS is an equity research and portfolio analysis firm owned by Morningstar Canada. It maintains a database of about 700 of the largest and more liquid Canadian stocks, plus more than 2,200 U.S. stocks, and spends a lot of time adjusting for unusual accounting items in each company's quarterly results to make sure screens can perform correctly.

What did we find out?

Keep in mind that this is just a screen and that more research is needed before an investor could conclude that dividend or distribution is at risk. Several of the names are also in the oil and gas sector, so energy prices will have a significant effect on dividends and distributions in the future.

Overall, Mr. McGee suggests investors assess and monitor debt levels at these names carefully.

"If distributions cannot be sustained by operating cash flow, firms may have to rely on debt to maintain them," he said. "Declining sales and cash flow combined with rising debt levels could lead to cuts or suspensions of distributions if their financial strength doesn't improve."