An increasing number of companies are paying out more than they earned, potentially raising sustainability issues with high-yield-paying companies. Alternatively, investors can rest easier at night with exchange traded funds that specifically target quality companies with a history of dividend growth.
About 20% of S&P 500 companies that pay dividends have paid out more than they earned in the last fiscal year, or up 9% from a decade ago, reports Mark Fahey for CNBC.
Related: High-Yield Dividend ETFs Come with a Price
To get a sense of sustainability of cash dispersals, ClientFirst Strategy president Mitch Goldberg points to a company’s dividend payout ratio, or the dividend per share divided by earnings per share – ratios above 1 indicate the company is paying out more than it’s earning, so lower numbers typically means a company has more wiggle room.
Over the past decade, all companies in the S&P 500 showed a rising dividend payout ratio, with a median ratio at a high of 37% today, compared to 20% in 2006.
High-dividend stocks may seem attractive in this extended low-rate environment, but these companies may be prioritizing short-term gains over long-term research and development. Goldberg warned that these companies may be at risk if a recession hits.
“It’s not going to take that much for these companies to acknowledge that they can’t keep up with their dividends,” Goldberg told CNBC. “I think investors who gorged on dividend stocks are in for a deeper pullback then they may have seen in previous cycles.”