Don't Get Burned When a Stock Cuts Its Dividend
General Electric's 50% cut caused a lot of consternation about who might be next. We'll help you spot hazards.
If you invest for dividends, you probably got a raise in 2017. More than 300 companies in Standard & Poor’s 500-stock index hiked their payout during the year, with increases averaging 11.5%. Yet investors in General Electric (symbol GE, $18) got a lump of coal just before the holidays as the firm slashed its quarterly dividend by 50% on November 13.
The cut wasn’t a surprise, given the firm’s struggles. But it raises questions: If a bellwether such as GE can’t sustain its payout in a strong economy, what other dividends may be on the chopping block? And how can you spot the next GE?
GE’s dividend cut looks like an outlier. The company was one of just 10 firms in the S&P 500 to trim or suspend its dividend in 2017 (through December 8). GE’s profits have been sliding for years, and its cash flow in 2017 was “horrible,” new CEO John Flannery said recently. His remedy: Stanch the bleeding by cutting GE’s payout.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Yet most big firms aren’t in bad shape. Corporate profits are rising briskly, overall. And analysts expect companies in the S&P 500 to increase their payouts by an average of 10% in 2018. Enactment of a tax overhaul could boost payouts further. “There’s nothing systemically wrong with the economy or corporate profits that would lead to lots of dividend cuts,” says market strategist Ed Yardeni, of Yardeni Research.
Sidestep trouble. Still, dividend land mines may be hiding just below the surface of some stocks, says Sam Stovall, chief strategist of research firm CFRA. Avoid them by sticking with solidly profitable firms with a long history of dividend growth. Companies such as 3M (MMM, $238) and Johnson & Johnson (JNJ, $141) fit the bill. Both are in the Kiplinger Dividend 15, the list of our favorite dividend-paying stocks (see The Kiplinger Dividend 15: Our Favorite Dividend-Paying Stocks).
Look for stocks with moderate payout ratios (dividends as a percentage of earnings). Note that slow-growing businesses with stable cash flows, such as phone companies and utilities, can maintain higher ratios than firms spending more to expand or those with unpredictable income.
But in general, a low payout ratio is a sign that your dividend is secure. Banks and other financial stocks now have the lowest payout ratios of any industry, averaging 30%, followed by health care companies (34%) and technology firms (39%). All are below the average 43% payout ratio for the S&P 500.
Red flags that a dividend may not be sustainable include deteriorating earnings and ballooning debt on the balance sheet. Investors may also want to monitor free cash flow, which can be a better gauge of a dividend’s cash cushion than a company’s earnings. Earnings can be inflated by one-time gains or other accounting adjustments, but positive free cash flow means that a company has spent what it needs to maintain its business and has cash left over—ideally enough to cover its payout.
Beware of sharply rising yields, too. Shares of Macy’s (M) now yield nearly 6%. Yet, like other struggling retailers, its sales and profits are falling, putting its dividend at risk. Another dividend that looks dicey is that of phone-and-cable firm CenturyLink (CTL). The shares yield 15%, but CenturyLink isn’t close to covering its payout with earnings or free cash flow.
Investing in a diversified basket of dividend stocks lessens the risk that you’ll be undone by the misfortunes of any single company. Consider Schwab US Dividend Equity (SCHD, $51), an exchange-traded fund in the Kiplinger ETF 20, the list of our favorite ETFs. Or check out Vanguard Equity Income (VEIPX) or T. Rowe Price Dividend Growth (PRDGX). Both are in the Kiplinger 25 list of our favorite funds.
-
Use An iPhone? You May Be Hearing From A Class-Action Lawsuit Group
A handful of suits against the iPhone maker seek to crack down on everything from app store purchases to messaging.
By Keerthi Vedantam Published
-
Capital One/Discover: What's In Their Wallet For You?
Push back on Capital One's planned merger with Discover is growing with one group of consumer advocates calling for a public hearing.
By Keerthi Vedantam Published
-
Stock Market Today: Stocks End Mixed Ahead of Retail Sales, PPI
Stocks took a breather Wednesday as investors looked ahead to tomorrow's inflation data.
By Karee Venema Published
-
How Stock Spinoffs Work — And How They've Performed
In theory, stock spinoffs should reward investors, but performance is mixed.
By Anne Kates Smith Published
-
Stock Market Today: Stocks Close Higher Ahead of Key Inflation, Jobs Data
The July personal consumption expenditures (PCE) index and the August jobs report are just two key data points on this week's jam-packed economic calendar.
By Karee Venema Published
-
Best Long-Term Investment Stocks to Buy
Some of the best long-term investment stocks include companies that are in good financial standing, have a low valuation and pay consistent dividends.
By Mark R. Hake, CFA Last updated
-
Stock Market Today: Solid 3M Earnings Help Dow Extend Win Streak
The blue chip index closed higher for a 12th straight day as Dow stock 3M rallied on a Q2 earnings beat.
By Karee Venema Published
-
Best Banks for High-Net-Worth Clients
wealth management Kiplinger's 2023 list of the best banks for higher-net-worth clients.
By Lisa Gerstner Published
-
6 Dividend Growth ETFs to Buy
Dividend growth outperforms the market over time and helps portfolios beat inflation. These dividend growth ETFs give investors the chance to buy the strategy in bundles.
By Kyle Woodley Last updated
-
Stock Market Today: Stocks Soar After Jobs Data, Debt Ceiling Deal
The major benchmarks rallied hard into the weekend after a mixed May jobs report and end to debt ceiling drama.
By Karee Venema Published