Investors can look at a company’s payout ratio to help gauge whether its dividend is sustainable.
However, in some industries, companies use adjusted profit calculations to gauge the safety of their payouts.
Payout ratio alone doesn’t always tell the whole story when it comes to the quality of a dividend stock.
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When you’re an income-oriented investor, it can be especially difficult to find out that a company in your portfolio has decided to cut or stop paying dividends. Such a move will not only affect your dividend income, but could also cause the share price to drop significantly. You are hit on both fronts.
One way to assess the riskiness of a stock’s dividend is to look at its payout ratio, the proportion of the company’s earnings needed to cover the dividend. The higher this ratio, the riskier the dividend can be. However, this is not always the case. Some high-yielding stocks may actually have safe dividends despite their seemingly high payout ratios.
Payout ratios Kenwoo (NYSE: KVUE), Enbridge (NYSE: ENB)and Real estate income (NYSE:O) today may ring alarm bells for investors. Not only do all of them have ratios above 100%, they also have yields of more than 5% at current share prices. Should investors be concerned about whether these companies’ payouts are sustainable at current levels, or could they be good income-generating investments that can be sustained over the long term?
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The healthcare giant Johnson & Johnson spun off from the consumer healthcare business as Kenwoo a couple of years ago. It is not a high-growth business, and the main reason most investors would want to own its stock is the dividend. It currently yields 5.5%, more than four times that S&P 500average yield of 1.2%.
The company has been in the news recently because President Donald Trump and Health and Human Services Secretary Robert F. Kennedy Jr. said that if mothers take Tylenol during pregnancy, their child is more likely to develop autism. Although there is no solid scientific evidence to support this claim, Tylenol is a key drug in Kenvue’s portfolio, generating approximately $1 billion in revenue. USD of annual revenue. Such claims threaten a large 15 billion For the source of the share of USD that the business brings in each year.
Kenvue recently raised its dividend by 1.2% to $0.2075 per share. That means it distributes $0.83 per share to its shareholders over the course of the year. That’s less than $0.75 in earnings per share over the last four quarters. However, Kenvue’s free cash flow during that period was $1.6 billion, which was only slightly more than its dividend payout.
Ultimately, the sustainability of payouts at current levels may depend in part on how these claims about Tylenol affect Kenvue’s finances. It’s too early to answer that question, so I’d like to wait and see with the stock.
Canadian pipeline company Enbridge is offering an even higher rate of about 5.9 percent. Unusually, this midstream energy stock offers a big payout, and the yield would be even higher if it weren’t for its 15% share price over the past year.
Investors can avoid the stock as it has a payout ratio of 130%. However, the oil and natural gas supplier measures its dividend based on its distributable cash flow (DCF), which excludes non-cash and other expenses that could reduce its earnings. Its DCF was C$2.9 billion in the second quarter. This was consistent with how it had been operating a year earlier. For the full year, management is forecasting DCF per share of CA$5.50-$5.90, which is well above the CA$3.77 per share paid in dividends annually.
Enbridge is one of the safer oil and natural gas stocks you can own, especially if you want a high dividend yield. Today, not only does it offer a large payout, but management has increased its dividend for 30 consecutive years. These are dividend stocks that you can safely invest in for a long time.
Another high-yielding dividend stock that may be an attractive option for investors today is real estate income. The real estate investment trust (REIT) has a yield of 5.4% at the current share price. However, if you look at its payout ratio of over 300%, you can be sure that the dividend will be cut soon.
But REITs, like many energy companies, also use adjusted calculations to estimate how much they can afford to pay out in dividends. In this case, the metric is funds from operations, or FFO. Real Estate Income’s FFO per share was $1.06 in the second quarter, almost identical to the $1.07 it reported a year ago.
Like Enbridge, Realty Income not only has a safe payout, but has regularly increased its dividend for decades. An added bonus with the stock is that, unlike most companies, Realty Income pays monthly, which can be beneficial for investors who want to receive dividends more frequently.
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David Jagielskis has no positions in any of the mentioned shares. The Motley Fool has positions and recommends Enbridge, Kenvue and Realty Income. The Motley Fool recommends Johnson & Johnson and recommends the following options: Long 2026 January $13 calls to Kenvue. The Motley Fool has a disclosure policy.
These 3 dividend stocks yield more than 5% with a payout ratio of over 100%. Is a dividend cut coming? originally published by The Motley Fool.
