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Dividend Danger: Are These High-Yield Stocks on the Brink?

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Recent corporate actions have sent a ripple through the dividend-seeking investment community. Intel, B. Riley, and Burberry Group, all boasting dividend yields above the S&P 500, have suspended their dividend payments. This raises a critical question: are high-yield stocks becoming increasingly vulnerable?

Unlike interest payments, which are contractual obligations, dividends on common shares are discretionary. Companies have the flexibility to decide whether to pay dividends and how much, based on factors like financial health, cash needs, and macroeconomic conditions. History is replete with examples of companies that attempted to maintain dividends even during challenging times, only to eventually succumb to unsustainable policies.

The Lure and Perils of High-Yield Stocks

The allure of high-yield stocks is undeniable. The promise of consistent income payments can be a powerful draw for investors seeking to supplement their retirement income or simply generate passive returns. However, it’s important to remember that high yields often signal underlying problems. A rapid decline in a stock’s price, which can lead to an inflated dividend yield, may reflect market pessimism about the company’s future prospects.

Piper Sandler recently identified Walgreens Boots Alliance, Pfizer, Dominion Energy, Oneok, and Eversource Energy as companies whose dividends could be at risk. The firm analyzed these companies’ cash flows and determined that their ability to sustain their current dividend payments was concerning.

A Closer Look at Dividend Sustainability

Walgreens Boots Alliance, despite its recent dividend cut, still offers a yield of over 9%. However, its financial position remains precarious, and further reductions or even a complete suspension of dividends cannot be ruled out.

Pfizer, on the other hand, appears to be in a stronger position. While its COVID-19 business has slowed, its other operations continue to generate healthy profits. Management has consistently prioritized dividend growth, and the company’s future earnings prospects suggest that it should be able to maintain and increase its payouts.

Dominion Energy is also taking steps to address its debt burden, which could improve its dividend sustainability. The company’s focus on reducing debt and growing its earnings suggests that its dividends are likely to remain intact.

Oneok, with its high score from Piper Sandler, appears to be in a relatively safe position. The company has a strong track record of dividend payments and has demonstrated its commitment to shareholder returns.

Eversource Energy, while offering a lower dividend yield, also has a history of consistent dividend payments. Its projected earnings growth suggests that it should be able to maintain its dividend policy.

Conclusion

While high-yield stocks can offer attractive income potential, it’s essential to approach them with caution. A focus on dividend sustainability is crucial. Investors should carefully evaluate a company’s financial health, cash flow generation, and management’s commitment to dividends before making investment decisions. By understanding the risks and rewards associated with high-yield stocks, investors can make informed choices and potentially benefit from the income they provide.