3 Stocks with unsustainable dividends
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Transcript of 3 Stocks with unsustainable dividends
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Why These 3 Stocks Have Unsustainable Dividends
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First, let’s see what makes a dividend “unsustainable”…
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The payout ratio
• By far, the number one indicator of a healthy dividend is a low payout ratio
• The payout ratio tells you how much of a company’s earnings are being paid out as dividends
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An example• Consider the case of Microsoft, which pays a
dividend of $1.12 per year (a 2.7% yield)• Microsoft is expected to earn $2.70 this year• So, the payout ratio is • In other words, Microsoft pays out 41% of its
earnings as dividends
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The significance of the low payout ratio is that if Microsoft’s earnings
were to drop unexpectedly, the dividend should be safe
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Payout ratios of some popular dividend stocks…(Based on 2014 consensus earnings)
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REITs: A special case
• Some of the highest-paying stocks on the market are real estate investment trusts (REITs)
• These should have a high payout ratio, as REITs are required to pay out at least 90% of earnings for tax purposes
• Ideally, REITs should have a payout ratio between 90-100%
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ARMOUR’s dividend is sustainable
• ARMOUR Residential REIT pays a dividend yield of 13.9%, but the company has a healthy payout ratio
• ARMOUR pays $0.05 per month, or $0.60 per year
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• The company is projected to earn $0.62 in 2014, making the payout ratio 96.8%, right in the “good” range for REITs
• So, while ARMOUR’s dividend is high, it makes sense financially, based on the company’s earnings
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Other “red flags” to watch for1. Very high debt - especially if the debt
repayment obligations are high, relative to cash flow
2. Lots of layoffs – may be indicative of problems with the business
3. Reduced earnings guidance – means the company might see trouble ahead
4. Dividend cuts by peers
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3 Companies with UNSUSTAINABLE
dividends
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Western Mortgage Asset Capital Corp (NYSE: WMC)
• The company pays out $0.67 per quarter ($2.68 per year), but is only expected to earn $2.38 annually during 2014 and 2015
• This is a payout ratio of 113%, meaning the company won’t earn enough to cover the dividend
Current Yield: 19.5%
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Resource Capital Corp (NYSE: RSO)
• This REIT focuses on commercial real estate debt, and pays $0.20 per quarter ($0.80 per year)
• Projected earnings of $0.52 (2014) and $0.73 (2015)
• This implies payout ratios of 154% and 110% for the next 2 years
Current Yield: 14.4%
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Windstream Holdings Inc. (NASDAQ: WIN)
• Windstream offers broadband, phone, and TV services
• The company has paid out $1.00 per year for 8 consecutive years
• However, earnings have deteriorated in recent years
• Just $0.31 per share is expected this year
Current Yield: 10%
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Sustainable dividend stocks for your portfolio