When you're an income-focused investor, it can be particularly aggravating to learn that a company in your portfolio has decided to cut or suspend its dividend. Not only does such a move affect your dividend income, but it's also likely to result in a sharp decline in the share price. You get hit on both fronts.
One way to gauge the riskiness of a stock's dividend is by looking at its payout ratio -- the fraction of the company's earnings that are needed to cover its dividend. The higher that ratio is, the riskier the dividend can appear to be. But that isn't always the case. Some high-yielding stocks' dividends may in fact be safe despite seemingly high payout ratios.
The payout ratios of Kenvue (KVUE +0.91%), Enbridge (ENB 0.77%), and Realty Income (O +0.62%) might raise alarm bells for investors today. Not only are all of their ratios over 100%, but their yields at current share prices are more than 5%. Should investors be concerned about whether these companies' payouts are sustainable at their current levels, or could they be good income-generating investments to hold on to for the long haul?
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Kenvue
Healthcare giant Johnson & Johnson spun off its consumer healthcare business as Kenvue a couple of years ago. It's not a fast-growing business, and the main reason most investors would want to own its shares is its dividend. Currently, it yields 5.5%, which is more than four times the S&P 500's average yield of 1.2%.
The company has been in the news of late due to President Donald Trump and Health and Human Services Secretary Robert F. Kennedy Jr. claiming that if mothers take Tylenol while pregnant, they increase the chances of their child having autism. Though there is no credible scientific evidence to support this claim, Tylenol is a key drug in Kenvue's portfolio, generating approximately $1 billion in annual revenue. As such, those assertions pose a threat to the source of a significant slice of the $15 billion or so that the business brings in annually.
Kenvue recently increased its dividend by 1.2% to $0.2075 per share. That means that over a full year, it distributes $0.83 per share to its shareholders. That's less than the $0.75 that its earnings per share totaled over the past four quarters. However, Kenvue's free cash flow during that time frame came in at $1.6 billion, which was only slightly higher than the cash dividends it paid out.
NYSE: KVUE
Key Data Points
Ultimately, the sustainability of the payout at its current level may depend in part on how these claims about Tylenol impact Kenvue's financials. It's too early to answer that question, which is why I'd take a wait-and-see approach with the stock.
Enbridge
Canadian pipeline company Enbridge offers an even higher yield of around 5.9%. It's not unusual for this midstream energy stock to offer a high payout, and the yield would be even higher if not for the 15% rise in its share price over the past year.
Investors might balk at the stock based on its payout ratio of 130%. However, the oil and natural gas mover evaluates its dividend based on its distributable cash flow (DCF), which excludes non-cash items and other expenses that can weigh down its earnings. Its DCF was 2.9 billion Canadian dollars in the second quarter. That was in line with how it performed a year earlier. For the full year, management projects its DCF per share will be in the range of CA$5.50 and CA$5.90, which is comfortably higher than the CA$3.77 per share it pays in dividends on an annual basis.
NYSE: ENB
Key Data Points
Enbridge is one of the safer oil and natural gas industry stocks you can own, particularly if you want a great dividend. Not only does it offer a high payout today, but management has increased the dividend for 30 straight years. This is the type of dividend stock you can safely invest in for the long term.
Realty Income
Another high-yielding dividend stock that can be a compelling option for investors today is Realty Income. The real estate investment trust (REIT) yields 5.4% at the current share price. But if you were to look at its payout ratio of over 300%, you might be convinced that a cut to the dividend is coming soon.
REITs, however, like many energy companies, also use adjusted calculations to assess how much they can afford to pay in dividends. The metric in this case is funds from operations, or FFO. Realty Income's FFO per share in the second quarter totaled $1.06, nearly identical to the $1.07 it reported a year prior.
NYSE: O
Key Data Points
Like Enbridge, Realty Income not only has a safe payout but it has also been increasing its dividend regularly for decades. An additional bonus with the stock is that, unlike most companies, Realty Income makes its payments monthly, which can be a benefit for investors who want to receive dividends on a more frequent basis.
