So you’ve found the perfect dividend stock offering a phenomenally high yield, but have you stopped to consider just how safe that dividend yield is? Often dividend yields that are pushed higher as a company’s stock price plunges lower should be taken as a warning sign of an impending dividend cut. While the stock’s current dividend yield may look attractive, investors also need to evaluate how safe the dividend really is.
eDividendStocks.com has put together a list of three stocks with very impressive dividend yields, but the underlying business fundamentals for these companies are very shaky. As net earnings decline in 2010, these dividends are at risk of being reduced in the months ahead.
Qwest Communications (Q)
Similar to telecom peers Verizon (VZ) and AT&T (T), Qwest offers dividend investors a very high yield of 7.6%. However, Wall Street is anticipating net earnings to plunge over 22% in 2010. If this scenario plays out, Qwest would be forced to borrow funds in order to maintain their current dividend level. The more likely scenario would be to reduce their dividend level.
Dividend Yield: 7.6%
Market Cap: 7.3B
2010 EPS Growth: -22.5%
2010 Est. Dividend Payout Ratio: 103%
General Maritime (GMR)
While currently offering investors a dividend yield of over 6%, net earnings are expected to decline by 73% in 2009. Things are only expected to get worse in 2010, when the shipping firm is expected to report a net loss. We would expect the company to reduce or even completely eliminate their dividend to preserve cash.
Dividend Yield: 6.3%
Market Cap: 433M
P/E (ttm): 14.1
Progress Energy (PGN)
The electric utility disappointed investors by reducing its profit estimates for 2010 well below Wall Street’s consensus expectations. While PGN should be able to cover their dividend payments, ongoing economic challenges and the inability to increase rates could lead them to reconsider their dividend strategy.
Dividend Yield: 6.4%
Market Cap: 11B
2010 Est. Dividend Payout Ratio: 83%
Just as you can’t judge a book by its cover, you certainly can’t just evaluate a dividend stock by its yield.
Disclosure: No Positions