One of the biggest risks when investing in dividend stocks is that payouts are never a guarantee and a company can decide to cut or suspend its payments, often without warning. Not only is it a sign that the outlook for the business isn't strong, but it also means a reduction in your recurring cash flow. And that could also send the stock into a tailspin, which will make your investment in the company even worse.
Two stocks with payouts that could be in danger right now are Welltower (WELL 0.36%) and ExxonMobil (XOM -2.78%). While both of these dividend stocks could be appealing due to their above-average yields, investors should take a closer look at these companies before deciding whether to invest in them and rely on their dividend income.
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1. Welltower
A real estate investment trust (REIT) often generates stable recurring revenue, which translates into solid cash flow for investors. And REITs need to pay out 90% of their earnings out to shareholders, ensuring that as long as the business is profitable, you'll receive a steady stream of dividend income. But the problem for a healthcare REIT like Welltower is that nursing homes are struggling amid the coronavirus pandemic, and that's wreaking havoc on their bottom line. The company has interests in approximately 1,300 senior living communities.
More than 100,000 COVID-19 deaths have been related to nursing homes as of Dec. 4, accounting for roughly 39% of all fatalities. The growing concern related to senior housing has resulted in increased safety protocols at facilities, and that's made turning a profit more of a challenge.
Welltower released its third-quarter earnings on Oct. 28, for the period ending Sept. 30, where it reported a net income of $395 million, down 39% from the prior-year period. The REIT's occupancy rate during September was 78.4% and had fallen for the seventh straight month since the start of the pandemic. In February, Welltower's occupancy rate was 85.6%.
Although vaccines for COVID-19 on the way, concerns surrounding a new strain of the coronavirus in the U.K. have renewed fears of just how long it may be before the pandemic is over and nursing homes are safe again.
Welltower already cut its dividend earlier this year, from $0.87 to $0.61. Today, the stock yields 3.9% which is still well above the S&P 500 average of 1.8%. And while Welltower's current payout ratio is 73% of its normalized funds from operations, further declines in profitability may lead to another reduction in the dividend next year.
While there's a possibility that senior homes recover in 2021 once the pandemic is under control, there's no guarantee that the demand will be there given all the negative press the facilities have endured this past year. In 2020, shares of the healthcare stock are down more than 23%, underperforming the S&P 500 and its 14% returns by a wide margin.
2. ExxonMobil
Another stock dividend investors should think twice about is ExxonMobil. Although the company resisted the urge to slash its dividend payments in 2020, it also didn't increase them, either. Exxon is a Dividend Aristocrat and has increased its annual dividend payments for more than 30 years in a row. Despite not hiking its dividend this year, the company's annual dividend payment of $3.48 per share in 2020 was still technically higher than the $3.43 that it paid in 2019, but the streak is in danger of coming to an end in 2021.
Through the first nine months of 2020, the oil and gas giant generated $135 billion in revenue -- down 31.7% from the $197.8 billion it reported during the same period last year. And its net loss of $2.4 billion is also nowhere near the $8.7 billion profit the company posted a year ago.
From a cash position, things don't look a whole lot better. Year to date, the company paid its shareholders $11.2 billion in dividends while its operating cash flow was only $10.7 billion. In the previous year, it generated more than double that amount from its day-to-day operations -- $23.4 billion.
There's no denying that Exxon needs to see stronger demand for oil and gas next year for its business to recover. But according to The Wall Street Journal, leaked internal documents from the company show that Exxon is lowering its expectations for oil prices over the next seven years, with cuts ranging between 11% and 17%.
Although the company is slashing expenses and is going to cut its total workforce by 15%, this could be a losing battle for Exxon as it tries to pull out all the stops to keep its dividend going. With too much uncertainty ahead for the industry, oil prices, and the economy as a whole, investors shouldn't feel too comfortable with Exxon's dividend right now, or its share price for that matter. Year to date, the stock is down 40%.
