The coronavirus pandemic is having a significant impact on the markets. This month, the Dow Jones dropped below 20,000 -- the lowest it's been in three years. And when share prices fall, dividend yields rise.
For dividend investors, it could be an opportune time to buy. But investors still need to be careful as a high dividend may not be sustainable. Let's take a look at three high-yielding stocks to see whether they're good buys today, or if investors should steer clear of them:
AbbVie (ABBV 0.76%) is down about 20% since the start of 2020. That's stronger than the S&P 500, which entering trading on Friday was down 26%. The healthcare stock's quarterly dividend of $1.18 is now yielding 6.6% annually. The company has raised its payouts by 195% since the stock began trading in 2013. It's a Dividend Aristocrat, as its payouts have increased for more than 25 years including AbbVie's time as part of Abbott Laboratories (ABT 0.37%).
It's a high yield for the drug manufacturer, and investors may be wondering if it's sustainable.
One way that investors gauge the health of a dividend is by looking at its payout ratio, which involves looking at its earnings and annual dividend. In the company's year-end results, which AbbVie released on Feb. 7, it reported diluted earnings per share (EPS) of $5.28. That's up 44% from the prior year. With an EPS $5.28, the company has enough room to accommodate its dividend, which on an annual basis pays $4.72 per share. Although the payout ratio is a bit high at 89%, it looks to be sustainable.
The statement of cash flow also corroborates the company's ability to continue paying its dividend. Operating cash flow was $13.3 billion in 2019, and after deducting acquisitions of $1.7 billion, there's still plenty left over to cover the company's dividend payments, which during the year totaled $6.4 billion.
AbbVie's future looks strong, and with healthcare in the spotlight as a result of the coronavirus and a possible shortage of drugs, the company's business shouldn't be a concern for long-term investors.
2. Carnival Corporation
Carnival Corporation (CCL 0.13%) stock has collapsed by 76% year to date as the coronavirus pandemic hit travel stocks particularly hard. With governments encouraging people to stay home, cruise ships are in low demand. And it certainly doesn't help that COVID-19's been spreading on cruise ships and stranding customers in the process.
The cruise ship operator pays a quarterly dividend of $0.50 per share, which at a price of around $12 yields more than 20% per year. The stock pays well above the S&P 500's average yield of 2%. It's a staggering yield, but whether it's sustainable is a separate issue.
The company released its fiscal 2019 results on Dec. 20. For the year, Carnival reported diluted EPS of $4.32, which makes the company's payout ratio a very manageable 46% of earnings. From a cash flow perspective, things were tighter as Carnival's operating activities generated $5.5 billion -- just enough to cover property and equipment purchases during the year totaling $5.4 billion. That wouldn't leave nearly enough to cover the $1.4 billion that Carnival paid out in dividends during the year.
However, even if cash flow wasn't a concern, the company's future is. The longer COVID-19 keeps customers from traveling, the longer the stock will stay down and the larger the impact will be on Carnival's future financials. The company has cut dividends in the past, and it wouldn't be surprising to see that happen again.
The energy stock is down 30% this year as concerns in the Canadian oil and gas industry continue to rise, and both the coronavirus and low oil prices threaten the survival of many Alberta-based companies like Enbridge. The company transports oil through its pipelines, and it needs a strong oil and gas industry for there to be demand for its infrastructure.
Like AbbVie, Enbridge is a Dividend Aristocrat. When the company announced in December that it would raise its payouts by 9.8%, it was the 25th consecutive year Enbridge had done so. Shareholders now receive a quarterly dividend of 0.81 Canadian dollars per share, which yields 9% annually.
In its annual report released on Feb. 14, Enbridge had a strong showing, posting a diluted EPS of CA$2.63 for the full year of 2019. That was up 80% from the prior year.
However, its EPS is less than the annual dividend payment it pays of CA$3.24, and the payout appears to be unsustainable from a cash flow perspective as well. Cash from the company's operating activities of CA$9.4 billion during the year was insufficient to cover dividend payments of CA$6 billion after factoring in CA$5.5 billion in capital spending.
Despite its streak, Enbridge's dividend may be in danger if oil prices don't improve along with conditions in the Canadian oil and gas industry.
Which stock is the safest to buy today?
The safest of the three dividend stocks listed above is AbbVie. It offers the lowest payout, but at 6.6% it's still a very strong dividend yield, especially given that it'll likely grow over the years as well.
Enbridge offers a growing dividend as well, but the oil price war involving Saudi Arabia and Russia makes any oil and gas stock a risky buy today, even one like Enbridge that's normally pretty safe.
Carnival is the riskiest stock on the list. Not only has it cut its payouts in the past, but it has plenty of incentive to do so now. Investors would be taking a significant risk by assuming this dividend will remain intact.
AbbVie is the best buy of the three, and it's the most likely to continue paying its dividend in 2020 and beyond.