Breaking News
Ad-Free Version. Upgrade your experience. Save up to 40% More details

Warning: These 4 Popular Dividends Are About To Be Slashed

By Contrarian Outlook (Brett Owens)Stock MarketsMar 24, 2020 07:34AM ET
Warning: These 4 Popular Dividends Are About To Be Slashed
By Contrarian Outlook (Brett Owens)   |  Mar 24, 2020 07:34AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items

Nearly every retirement portfolio on the planet is reeling from the coronavirus fallout. Recoveries are going to vary widely, however, depending on the safety of the dividends in each basket.

If your income stream is safe, then you’re well ahead of the game. When stock prices recover (and they will, as every bear market eventually gives way to a new bull), your portfolio is going to bounce right back. Assuming the payouts didn’t miss a beat, then you can rest assured you’ve got an uninterrupted income stream between now and then.

The bad news, however, is that cuts to dividend payouts have already started, with Ford (NYSE:F) suspending its payout last Thursday. Then there’s Boeing (NYSE:BA), which was a basket case before the coronavirus outbreak. The company’s dividend yield surged to 8.4% … right before the company suspended it on Saturday.

Those are just two obvious tickers to dump now, if you haven’t already. We’ll name four more shortly.

First, though, let’s talk about that one-step “dividend safety check” you can perform on your stocks right now.

Performing this simple test will help secure your income stream and, if it leads you to sell any laggards, free up cash for the fantastic buying opportunities we’ll see in the weeks and months ahead (I can’t stress this enough, and I’ll be flagging these “deals of the decade” for you in my Contrarian Income Report service).

Your “1-Click” Dividend Safety Check

I’m talking about checking the payout ratio on each of your holdings. If you’ve been buying dividend stocks for a while, you likely know the payout ratio. You calculate it by dividing the total amount of dividends paid by the company’s last 12 months of net income.

Generally speaking, if you’ve got a stock with a payout ratio of 50% or less, its dividend is likely safe. As you climb closer to 100%, the payout’s safety falters.

But there’s a problem with this formula, and it’s on the “net income” side of the ledger. Put simply, net income is an accounting creation. It can be easily manipulated to overstate cash-flow generation. But it can, at times, understate it, too.

Take insurer Chubb (NYSE:CB), for example. It recently popped up on a Barron’s list of high-quality, defensible dividends due to its low net income–based payout ratio: a mere 30.4%.

However, this is one case where net income is understating cash flow: the insurer’s free cash flow payout ratio is even better: just 21.4%. And that ratio has actually been moving lower in the last three years:

A Safe Dividend Gets Safer

CB Payout Ratio Chart
CB Payout Ratio Chart

In other words, Chubb could double its payout tomorrow and still stay well below our 50% “safety line.”

But let’s back up a second: what do we mean by “free cash flow payout ratio”?

Free cash flow (FCF) tells you how much cash a company is generating once it’s paid the cost of maintaining and growing its business. You calculate it by subtracting capital expenditures from a company’s cash flow from operating activities (both figures are available under the “Financials” tab on Yahoo (NASDAQ:AABA) Finance). It’s a much more accurate view of the cash a company is generating than net income.

We’re going to get into four stocks with dangerous free-cash-flow payout ratios in just a few moments more. First, though, let’s square the circle on Chubb.

Coronavirus No Match for Chubb’s Dividend

If you’re looking for a safe-dividend checklist (and who isn’t these days?), Chubb provides us with a few other strong points to look for.

Aside from its safe FCF payout ratio, the company also boasts rock-solid dividend history: Chubb is a member of the Dividend Aristocrats, the 57 US companies that have raised payouts for 25 years or more (including many previous crashes, such as the financial crisis, the dot-com bust and 9/11).
And on February 27, well after the market had already started falling from its February 19 peak, Chubb rolled out another hike, to the tune of 4%. That’s a pretty strong statement from management.

Finally, the payout is backed by Chubb’s strong balance sheet, with $15 billion of long-term debt, as of December 31—just 8% of its $177 billion in assets—and $5.8 billion of cash on hand.

Now let’s wrap up with a look at those four dangerous dividends I mentioned earlier, as measured by their FCF payout ratios.

4 Dangerous Dividends to Dump Now

4-Dividends To Sell
4-Dividends To Sell

Western Digital (NASDAQ:WDC) has taken a double hit from the coronavirus, with demand for its memory chips falling in China first, and now, with the outbreak in Europe and North America, in those markets, too. Meantime, WDC’s cash holding is shrinking as its dividend—unsustainable through cash flow—is paid out of pocket.

WDC’s Dwindling Cash Cushion

WDC Cash Decline
WDC Cash Decline

Next, it’s no surprise that Wyndham Hotels & Resorts (NYSE:WH) is taking a hit from the coronavirus, prompting the company to withdraw its outlook for 2020. Given that it was already paying 224% of cash flow as dividends as of the end of December, we can assume this payout is on borrowed time.

Abercrombie & Fitch (NYSE:ANF) meanwhile, shuttered all its stores outside the Asia-Pacific region on March 15. It will continue to sell online, but faces a lot of competition in that space, as well. The dividend, which consumes 154% of FCF, seems likely to be cut to save cash.

Finally, ExxonMobil (NYSE:XOM), whose dividend was already in jeopardy before the double hit of the coronavirus and the oil-price war hit. Don’t gamble on this 10% yield. It’s a trap ready to spring.

Forget Chubb: Buy These 5 “Recession-Resistant” Dividends (Up to 13%!) Now

There’s just one problem with buying Chubb now: even with the pullback, you’re still only getting a 3% dividend yield here!

That’s pretty meager when you consider that the stock (in blue below) has fallen much further than the S&P 500 this year:

A 3% Payout Is Little Solace for This

SPY CB Price Chart 2020
SPY CB Price Chart 2020

Now, if Chubb were offering a huge dividend yield to lure investors back in, I might be able to overlook this chart.

But why would you buy Chubb’s 3% dividend when there are so many stocks paying a lot more right now?

Like the 5 far better “recession-resistant” picks I’ll show you right here. They’ll help tone down your portfolio’s volatility now—and when the crisis passes, these 5 picks are perfectly positioned to soar.

Just how big are the dividends we’re talking about? The lowest of the bunch clocks in at a solid 6.3% yield. The highest? An incredible 13%!

With payouts like that—and Treasuries yielding less than 1% now—you can bet that investors will storm into these plays when the market starts to find its footing.

In fact, I’m betting these 5 stout dividends will lead the rush higher in the (inevitable) rebound. And while you wait for that to happen, you’ll be banking their solid 6.3% to 13% dividends!

Disclosure: Brett Owens and Michael Foster are contrarian income investors who look for undervalued stocks/funds across the U.S. markets. Click here to learn how to profit from their strategies in the latest report, "7 Great Dividend Growth Stocks for a Secure Retirement."

Warning: These 4 Popular Dividends Are About To Be Slashed

Related Articles

Declan Fallon
Indices Attempt Support Rally By Declan Fallon - Sep 17, 2021 2

Markets aren't exactly powering higher but there is an attempt to develop some form of swing low. The NASDAQ has the clearest opportunity. The last couple of 'white' candlesticks...

Warning: These 4 Popular Dividends Are About To Be Slashed

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (1)
Sam F
Sam F Mar 24, 2020 8:48AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
What are the 5 strong dividend stocks you said you would share on here?
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email