In today’s low-interest rate environment, dividend stocks remain hot. High-quality dividend stocks, such as dividend aristocrats, offer the potential for payouts that go up over time. Not to mention, share-price appreciation adds in long-term price gains as well.
Yet, this investing strategy is far from a sure thing for an income investor. High payout ratios — the percentage of earnings paid out as dividends — can be an area of concern for these types of plays.
For many names, including some of the more blue-chip ones, payout ratios have reached unsustainable levels. The result? At some point, these companies will have to slow down their payout growth. Or worse, cut or suspend the dividend entirely. Stocks in companies that go this route could see big downward pressure under either scenario.
So, taking a look at dividend stocks, which names could end up slowing down or suspending their payouts? These seven stand at risk of doing so:
- IBM (NYSE:IBM)
- Coca-Cola (NYSE:KO)
- Altria Group (NYSE:MO)
- PPL Corporation (NYSE:PPL)
- AT&T (NYSE:T)
- Vector Group (NYSE:VGR)
- ExxonMobil (NYSE:XOM)
Dividend Stocks: IBM (IBM)
Yielding around 4.9%, IBM stock may be seen as one of the top-shelf dividend plays out there. Barron’s even recently included it on a list of dividend stocks that could help retirees build an income stream in their golden years.
There’s much good to be said about this stock’s strengths as an income play. Yet, there may be some reason for concern as well. With its payout ratio now near the 60% mark, it may have to start slowing down its dividend growth rate. Even as earnings growth continues to exceed it.
Why? As a Motley Fool commentator recently broke it down, the upcoming split-up of IBM into two companies — one a faster growing cloud/AI play, the other a slower-growing IT services provider, could change things. The faster-growing segment could cool down on the payout, in order to invest in growth. The slower-growing piece may have the cash flow to continue a high dividend policy. Yet, without the fast-growing cloud component, it may not be able to keep up with payout increases.
IBM’s pending divestiture may help to unlock shareholder value. But, if income, not appreciation, is your focus, you may not want to buy this for its yield alone.
Coca-Cola stock has long been a favorite long-term holding among investors, including legendary investor Warren Buffett. But, just because Buffett, whose Berkshire Hathaway (NYSE:BRK.A,NYSE:BRK.B) has owned the stock for decades, holds onto it, doesn’t mean it’s a screaming buy for those looking to enter an initial position today.
With its 3.2% dividend, backed in large part by its deep economic moat, this seems like another great vehicle to generate dividend income. Yet, with its payout ratio now at 78.3%, its yield is starting to look unsustainable.
Sure, with 58 consecutive years of dividend growth, it’s hard to see it cut its payout. Just like with IBM, the earnings per share (EPS) growth of KO stock continues to exceed its average dividend growth rate. But, given its main soft drink business has matured, the company may have to deploy more capital to diversify its offerings over time.
With nearly 80% of its earnings going out the door as dividend, this may be challenge. With the risk the company has to cut down its payout, or at least slow down its rate of growth, other dividend plays in the consumer staples sector may make for better opportunities.
Altria Group (MO)
As I’ve discussed in prior articles on dividend stocks, I’m a big fan of MO stock. But, while previously I’ve talked down concerns about this tobacco company’s high payout ratio, I’ll concede now, that, over the long-haul, it may become a larger concern.
Why? For the past several decades, price increases have helped the company counter the secular decline of cigarette smoking in the United States. But, what worked in the past may not work in the future. Altria may be able to soften the blow, via diversification. But, so far the jury’s still out on this.
Its investment in e-cigarette maker Juul was more or less a bust. MO’s stake in cannabis company Cronos Group (NASDAQ:CRON) has yet to pay off as well. It may find success with its reduced-risk heated tobacco products. But again, it’s still too early to tell.
Earnings continue to grow in the low single digits, which may be enough to allow it to keep its current annual payout ($3.44 per share) as is. But, with more than 75% of its earnings being paid out as dividend, I’ll admit that, at some point, something’s got to give.
A few months back, when shares were at their lows, and yielding nearly 10%, this was a stronger opportunity. But, after its rebound back to around $51 per share, it may be best to hold off adding to positions here.
PPL Corporation (PPL)
Just like with Altria, PPL stock is another dividend-focused name I’ve covered quite a bit here on InvestorPlace.
When I wrote about dividend plays in the utility space back in July, I highlighted it as one of the highest yielding ones out there. Yet, while the uncertainties around it have been (in my view) priced too much into it, its days as a solid income stock may be numbered.
Why? As a Seeking Alpha commentator recently wrote, the company’s pending sale of its U.K operations, and subsequent purchase of Narragansett Electric, may result in PPL cutting its dividend to conserve cash. That’s not to say it’ll cut its dividend entirely. But, any sort of reduction could cause some volatility.
With this in mind, buying it just for the yield may not be a great idea at the present time. Investors more focused on gains, though, may find opportunity here. If this asset swap works out as expected, it could help move the needle once again for the stock.
Trading sideways between $25 and $30 per share for the past year, success with this deal could help push it back to prior year highs (above $35 per share). In short, this may be a great turnaround play. But, a great idea for dividend investors? Not so much.
Search the phrase “dividend stocks,” and T stock will be one of the first names that pops up. But, while AT&T’s 6.83% yield is appealing, longstanding concerns about its sustainability remain on the table.
The problem is the telecom and media giant’s bloated balance sheet. Telecom companies typically use a lot of debt in their capital structures. But, a large chunk of AT&T’s debt comes from its late-2010s buying spree of media companies, including TimeWarner (now WarnerMedia). Its recently launched HBO Max streaming service has performed well.
CEO John Stankey has said a dividend cut is not necessary. But, while it may be able in the near-term to pay out its fat yield and finance growth, this may not go on indefinitely.
If the company’s performance in the coming year falls short of expectations, and additional capital spending is required to stay competitive, a reduction in its payout could be inevitable.
Admittedly, with the dividend growing at an anemic rate (an average of 1.93% over the past five years), AT&T may be able to keep it steady at present level. Yet, there’s a reason why investors haven’t bid up shares, which remain stuck at around $30 per share over the past year.
As uncertainty continues, look elsewhere for an income play.
Vector Group (VGR)
Compared to the other names discussed here, Vector Group is a relative small-fry. The company, which owns a discount cigarette maker (Liggett Vector Brands), a real estate brokerage focused on the New York City market (DouglasElliman), and a smattering of real estate interests (New Valley Realty), is an interesting mix of holdings.
But, what may be most appealing about it is its dividend.
Yielding 5.67%, VGR stock has been a high-yielding name for income-focused investors willing to go off the beaten path. Yet, even after halving its dividend in 2020 (from 40 cents per quarter, to 20 cents per quarter), its level of payouts could get another haircut.
While the company has over time pivoted into more of a real estate play, tobacco remains its cash cow. The majority of its sales still come from its discount cigarette business. And, while the real estate services business could be set for a comeback, given the strong rebound in NYC residential real estate sales, projections of essentially zero earnings growth for Vector between 2021 and 2022 point to this not helping to move the needle overall by much.
As it stands now, around 90% of Vector’s earnings are paid out as dividends. If its earnings growth remains weak, the company could again reassess how much it pays out to investors.
Surging oil prices have helped to reduce fears that oil giant ExxonMobil will have to cut its payout. Earnings are set to rebound in a big way this year and the next.
But, as seen in the recent credit rating downgrade from Moody’s, the company may have to eventually change its current set of priorities (dividend first, debt concerns second). Borrowing heavily to maintain its payout during last year’s depressed oil price environment, the oil giant was basically borrowing from Peter to pay Paul’s dividend. But, with the prospect of it resuming making its payout out of operating cash flow, there’s been a massive change in investor sentiment about XOM stock.
Shares have soared more than 73% in the past six months, mainly due to the rapid rebound in oil prices. But, confidence that its dividend is now sustainable again has helped as well. However, while anticipation of better times ahead has boosted the stock, buying in now for the yield may not be the best move.
Exxon’s new policy of cutting capital spending to maintain the dividend may mean its no longer levering up its balance sheet. But, borrowing from the future to satisfy the present is by no means a sustainable idea, either. After its stunning recovery, it may not be worth it to chase this still-risky high-yield play.
On the date of publication, Thomas Niel held a long position in MO stock.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.