Some dividends are too good to be true. Whether it's a payout that may not be sustainable in the near future or fundamentals that are starting to sour you can't trust a generous yield.
Danger may be lurking for ExxonMobil (XOM 0.23%), AT&T (T -1.37%), and Coca-Cola (KO 0.31%). They're household names -- and I actually own one of them -- but these dividend rates aren't guaranteed unless things turn around soon. Let's break it down.
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ExxonMobil
One of this week's biggest surprises is that ExxonMobil hit a 52-week high on Wednesday. We're not driving as much as we used to. A lot of us are trading our gas-guzzlers for electric vehicles. Obliviously to the new normal ExxonMobil is putting the pedal to the metal. It paid out more than it earned in 2019, and it lost money on a 19% plunge in revenue last year.
The buoyant price has pushed what was a double-digit percentage yield a few months ago down to 6.3%. It doesn't seem sustainable if you connect the dots that will result in more pain at the pump. The bullish argument for ExxonMobil is that fuel prices have been moving higher lately, and with that analysts are juicing up the oil and gas behemoth's profit targets for next year. The market's hopeful for a rebound, but I think the perfect storm of less driving, more fuel-efficient cars, and a gradual shift to electric vehicles makes this a dangerous payout.
AT&T
There comes a time when every Dividend Aristocrat is tempted to give up the crown. After 34 years of hikes, AT&T chose not to boost its quarterly distributions earlier this year when it has historically done so. There's still a lot of 2021 left if it wants to keep the party going, but with its fledgling wireline and TV businesses in a funk and its recent WarnerMedia acquisition hungry for an investment in content, it may not be in the cards.
AT&T is the one stock on this list that I do own, and I believe it can overcome the end of its hikes. Its future is inevitably a combination of its popular wireless service and WarnerMedia, and at that point it can use the cash flow from its wireless business to participate in the content arms race to keep WarnerMedia's assets relevant.
However, AT&T is also dangerous unless it's able to unload its DirecTV subsidiary and find a way to minimize the slow fade of U-verse and its legacy wireline business. AT&T's big dividend could be endangered in the future, especially if it commits more to being a media mogul and less to being just another high-yielding telco.
Coca-Cola
With a yield of 3.3%, Coca-Cola packs the lowest distribution rate on this list. The problem for the iconic pop star is that the $1.64 a share in distributions it paid out last year is 91% of its 2020 profit.
The bullish counter here is that Coca-Cola knows what it's doing. Its payout ratio has been at 75% or higher for seven consecutive years. It's a money machine with a predictable stream of high-margin revenue. Soft-drink consumption in the U.S. peaked in 2004, but Coca-Cola has shrewdly expanded into sparkling water, energy drinks, juices, and even coffees.
It may not be enough. Revenue has now declined in seven of the past eight years, including a rough end to 2020. Coca-Cola still boosted its dividend last week, stretching its streak of annual hikes to a whopping 59 years. Analysts see earnings bouncing back this year, but what premium beverage consumption trends continue to wane? Will Coca-Cola be so set on extending its Dividend Aristocrat reign to 60 years that it boosts its distributions next year even if things aren't back on track? Coca-Cola is a fluid situation in more ways than one.
