High-yielding dividend stocks can be great to own, but they can end up being losing investments if their payouts are unsustainable. There's nothing like a dividend cut to send the price of an income stock into a deep tailspin. High dividend yields are often cited as a primary reason for buying these stocks. It certainly isn't because of their stock price growth potential. If the reason goes away, so does the investor interest.
Two dividend stocks with high yields that are also dealing with high payout ratios that investors might want to watch carefully are Sabra Health Care (SBRA -0.58%) and Kraft Heinz (KHC 1.31%). Those high dividend yields might be tempting, but are they safe? Should investors expect a dividend cut?
1. Sabra Health Care
Sabra Health is a real estate investment trust (REIT) that's focused on healthcare, with skilled nursing and transitional-care facilities accounting for two-thirds of the 407 properties in its portfolio. It also has more than 100 senior housing properties. Year to date, its shares are down roughly 9%, but still doing better than the S&P 500, which is down 17%.
REITs tend to have a tough time during economic downturns like the one we currently face because of how rising interest rates affect their business model. REITs often carry significant debt on their books, and that can be risky amid rising interest rates. As of the end of September, Sabra had $2.4 billion in debt on its books versus total assets of $5.8 billion.
There's also risk relating to its dividend, which is yielding a staggering 9.8% right now. The nature of how REITs operate means that they can sometimes generate yields this high, but even for a REIT, that percentage is above average and unusual. While that could mean significant dividend income for investors, it's not a whole lot of good if it isn't sustainable.
For the period ending Sept. 30, Sabra's funds from operations (FFO), which is the equivalent to earnings per share for REITs, totaled $0.28 per share -- which is less than the $0.30 that the stock paid out in dividends during the quarter, putting its payout ratio above 100%. Some companies can manage to pay out more than 100% of FFO in the short term because of the ways rents are collected over the course of a year and how the revenue is accounted for, but Sabra Health doesn't want to make a habit of this. When looking at other metrics, like free cash flow less dividends paid, the REIT still looks to be in OK shape.
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Sabra's dividend might be safe in the short term, but I wouldn't rely on it for the long term. Sooner or later, a cut could be necessary in order to give the company's financials more breathing room.
2. Kraft Heinz
Packaged foods company Kraft Heinz made for a fairly stable investment this year with its stock price up 7% in 2022 as the business's products are necessities for millions of households around the world.
In times of economic uncertainty, there is often temptation amongst consumers to avoid the higher-priced name brands that Kraft Heinz specializes in and to buy a generic house brand. But recent earnings suggest Kraft Heinz's business is showing that it benefits from strong brand loyalty. For the period ending Sept. 24, its sales totaled $6.5 billion and were up 2.9% year over year, even though the company raised prices on many of its products to help offset increased production costs.
Still, the price increases didn't quite cover all the increased costs as earnings of $432 million for the period declined 41% year over year. This might have investors worried about the sustainability of its dividend. But much of the drop in profitability was due to noncash impairment charges. When factoring those items out, the company's profits would be flat from the prior-year period.
Although Kraft technically has a payout ratio of over 160% this quarter, the dividend is safer than it looks. Its adjusted earnings per share (which excludes impairment charges) of $0.63 is 58% higher than the $0.40 that it pays out in dividends every quarter.
Overall, the 4.2% dividend yield appears safe and could make the Buffett stock a good investment at the moment. At just 14 times its future earnings (based on analyst estimates), Kraft is trading cheaper than the average S&P 500 stock, which trades at a multiple of just under 18.
