No individual, family, government or publicly traded company can operate long if they are spending more than they earn. That holds true for dividend stocks as well. At eDividendStocks.com we strongly recommend dividend investing strategies, but proper research must be done when selecting dividend paying stocks.
Not every stock can afford to pay a dividend. That’s ok and hopefully those companies are working to develop their business model so that they will have predictable cash flows in the future to sustain a dividend.
Other companies try to impress investors by paying out a bigger dividend than they can really afford. This is no different than individuals who buy a bigger house than they can really afford just to impress their friends and neighbors. Eventually, the burden of jumbo mortgage payments leads to disaster.
Here are 3 dividend stocks that are currently living above their means. All 3 companies are paying out more money in dividends than they can afford. In fact, they all have payout ratios above 100% which is never sustainable.
Frontier Communications (NASDAQ:FTR) is still the highest yielding stock in the S&P 500 even following their recent 25% dividend cut. That dividend cut helped to reduce their dividend burden, but Wall Street only expects FTR to earn $.45 per share next year. That gives Frontier a 167% payout ratio. Of course, that is a little deceiving since the company pays out only 58% of their free cash flow. Unfortunately, both cash flows and net earnings continue to decline leaving some investors wondering how long Frontier can sustain this dividend level.
Vulcan Materials (NYSE:VMC) has really been disappointing investors lately. Last quarter VMC posted a loss of $.18 per share when Wall Street analysts were expecting a gain of $.24. The stock price has fallen over 30% since the beginning of the year and now investors are starting to wonder about their dividend as well. Vulcan pays out $1.00 per year in dividend payments, but the company is almost certain to post a loss this year and Wall Street is only looking for $.23 per share in earnings in 2011. Last year, the company slashed their dividend by 49%, but given the company’s current performance it’s hard to see how they can afford even their current $1.00 per share dividend.
Windstream (NASDAQ:WIN) is another telecom stock that is trying to impress investors with their big dividend. WIN currently yields an amazing 8.2% putting them ahead of high-yielding telecom giants Verizon (NYSE:VZ) and AT&T (NYSE:T). However, their dividend payout ratio is 130% this year and even with improving earnings in 2011 the ratio will still be above 120% next year. Although similar to Frontier, Windstream pays out less than 60% of their free cash flow in dividends. Investors would undoubtedly feel more comfortable about investing in Windstream if their payout ratio was closer to Verizon and AT&T’s (e.g. below 100%).
Disclosure: No positions