When a corporation decides to cut its dividends, Wall Street tends to throw a temper tantrum and mangle the company's stock price. Knowing this, it's fairly easy for businesses with high dividends and shrinking earnings to find themselves in a dilemma: decrease dividends and feel the wrath of Mr. Market, or keep short-sighted shareholders satisfied and hope things look better in the future. Read on as I tell you about some of the companies I believe are currently in dividend no-man's land -- and whether you need to be concerned.
Look to the West?
Canadian company Penn West Petroleum
To pay investors, the company is considering $1 billion or more in asset sales, and that's after it already cut its dividend by more than 40%. With natural-gas prices falling, Penn West needs to start looking for a big break in all directions if it wants to remain afloat in the years to come.
Telecom company Windstream
Dividend investors took a major hit this week when mobile carrier Cellcom Israel
So long, dividend. But investors can also kiss Cellcom Israel's 121% payout ratio goodbye. With a 63% quarterly increase in free cash flow, Cellcom may well be making the right move.
REITs: An exception to the rule
Payout ratios are a useful tool to judge the sustainability of a company's dividend, but they don't always tell the whole story. Real estate investment trusts, or REITs, are a special type of security required by law to pay out at least 90% of earnings in the form of dividends. In return, REITs avoid entity-level taxation and can thus pass on more of their profits directly to investors.
But REITs don't always look right. Annaly Capital
If you're looking for a REIT option that could actually maintain its high dividend yield, I'd point you toward Chimera Investment
It's easy for investors to get hungry when decent companies serve up delicious dividends, but wetting your whistle on the wrong stock can get you burned. Know whether earnings or free cash flow is more important, watch out for companies sacrificing growth to prop up their dividends, and remember that even tax-free REITs aren't always right for your portfolio.
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Fool contributor Justin Loiseau has no material interest in any companies mentioned in this article, but wishes his parents had given him an allowance comparable to Windstream's payout ratio. Follow Justin on Twitter, @TMFJLo, and on Motley Fool CAPS, @TMFJLo.
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