High-yielding dividend stocks can make for attractive investments given the potential income they can generate for your portfolio. But there is often a trade-off when it comes to high payouts, as high yields may not always be sustainable.
One metric investors often rely on to help assess the safety of the dividend is the payout ratio. That's the percentage of a company's earnings that it pays out to its investors as dividend income. When it goes over 100%, this is a concern as it means the company isn't earning enough to cover its dividend.
Three stocks that pay more than a 5% dividend yield and also have alarmingly high payout ratios of more than 100% right now are Pfizer (PFE 0.55%), Enbridge (ENB -1.21%), and Philip Morris International (PM -1.11%). Are these stocks that are likely to cut their payouts in the near future?
1. Pfizer
Healthcare giant Pfizer provides investors with a fairly high yield of 6.1%. That's 4 times higher than the S&P 500 average of 1.4%. But investors may be dissuaded from investing in the healthcare company for the dividend as Pfizer reported diluted earnings per share (EPS) totaling just $0.37 in 2023 -- that's less than even its quarterly dividend payment of $0.42.
At first glance, Pfizer's dividend would appear to be unsustainable and due for a cut. The company experienced a 42% decrease in revenue last year as revenue from its COVID-19 products diminished.
But the big reason the company's bottom line was so poor was that Pfizer also wrote off COVID product inventory, which impacted its earnings. The company's adjusted EPS was $1.84, and Pfizer projects that will increase to at least $2.05 for the current year. Pfizer is planning to save $4 billion in expenses through a "cost realignment" program.
Overall, there is some risk with Pfizer's dividend but it isn't overly concerning. The company is in the midst of a transition away from COVID-19 products and its recent acquisition of oncology company Seagen also means that it will need to trim some costs related to that purchase. This has the potential to be an underrated buy as Pfizer's stock is trading at a fairly modest 12 times its estimated future profits.
2. Enbridge
Pipeline company Enbridge pays an even higher dividend yield of 7.9%. For 2023, the Canadian-based oil and gas business reported earnings totaling 5.8 billion Canadian dollars, for an EPS of 2.84 Canadian dollars. On an annual basis, Enbridge pays CA$3.66 in dividends per share. If you were filtering out stocks with payout ratios in excess of 100%, you could end up skipping this stock, and that could be a mistake.
In Enbridge's case, the company incurs significant depreciation expenses as it is an asset-heavy business, and that can often make its earnings look underwhelming. But it and many other oil and gas stocks rely on distributable cash flow (DCF) to help assess the safety of their payouts. This is a calculation that more closely resembles cash flow than accounting profits. Last year, the company's DCF of CA$11.3 billion rose by CA$0.3 billion from 2022. With 2.1 billion shares outstanding, that puts its DCF per share at around CA$5.30.
Enbridge has increased its dividend for 29 consecutive years and is one of the safer oil and gas stocks for income investors to rely on. Its high payout ratio is misleading as this can be an excellent dividend stock to buy and hold.
3. Philip Morris International
Tobacco company Philip Morris International pays a dividend that yields 5.8%, which is also well above the S&P 500 average. For 2023, its diluted EPS of $5.02 came in less than its current annualized dividend rate of $5.20 per share.
This company's net revenue of $35.2 billion rose by an impressive rate of nearly 11%. But Philip Morris' operating income totaled $11.6 billion and fell by 6% as the company incurred many expenses related to impairment, acquisitions, and geopolitical issues. Its adjusted operating income of $13.3 billion rose by 3%.
Philip Morris' dividend may appear to be sustainable for now, but this is the riskiest payout on the list. The company faces an uncertain future as it still relies heavily on cigarettes. Last year, Philip Morris' cigarette shipments were down 1.4% but still totaled 612.9 billion versus 125.3 billion for heated tobacco units. And the jury's still out on just how much safer heated tobacco products are than cigarettes.
The company may struggle to make much of an improvement in its EPS in the future, so while a dividend cut may not be inevitable, this isn't a stock I wouldn't feel comfortable owning right now.
