Stock dividends can be a steady and significant source of income—and when a company is raising its dividend, that also can help boost the stock price. But when companies cut dividends, it tends to have the opposite effect. Latest example: In November, General Electric cut its dividend for only the second time since the 1930s. Its stock price fell 11% in the week after the cut.
Warning signs of a potential dividend cut include double-digit dividend yields…great uncertainty about the company’s growth prospects…and/or a high “dividend payout ratio”—the percentage of a company’s earnings that it delivers to shareholders in the form of dividends. Investors should consider avoiding such companies—and even selling their stocks and replacing them with stocks of healthier dividend-paying companies. Four widely held companies likely to cut their dividends…
AT&T (T) recently had a payout ratio of 94%, which means it is using almost all its earnings to pay shareholders, so any slowdown in business could mean it might not generate enough cash to cover the dividend. All of AT&T’s phone businesses have slowed or shrunk…and its DirecTV satellite TV business is losing subscribers.
CenturyLink (CTL) is struggling to retain landline phone customers and compete against larger players offering Internet services. Its stock fell 29% in 2017 through December 8, pushing up its dividend yield to a recent 14.7%. Its recent payout ratio was 372%.
GlaxoSmithKline (GSK) is facing heavy generic competition for its best-selling respiratory drugs including Advair. Its recent payout ratio was 170%.
Guess (GES), which has 317 clothing stores in the US and also is carried by chains such as Macy’s and Nordstrom, is losing business to online competitors such as Amazon.com. It recently had a payout ratio of 145%.