High-yield dividend stocks always attract investors looking for income. Yet hiding within a high yield can be a potential landmine that could threaten a company's ability to keep paying those lucrative dividends over the long haul. To help you identify potential problems before they happen, let's take a look at three dividend stocks that have at least a chance of reducing their quarterly payouts in the near future.
Chevron is weakening
The first stock in this list is probably the most controversial, as Chevron (NYSE:CVX) has accumulated a 27-year track record of increasing its annual dividend each and every year. Yet investors had to notice that the oil giant chose to break with its long-standing tradition of boosting its payout during the second quarter of the year, maintaining its current quarterly dividend of $1.07 per share. Thanks to big share-price declines resulting from the plunge in oil, that now represents a 4.7% yield, putting it among the two top-yielding stock in the Dow Jones Industrials (DJINDICES:^DJI).
Any concern over Chevron's dividend comes from the fact that for two consecutive quarters now, the oil company has had earnings that were less than the quarterly dividend amount. That has sent its payout ratio soaring, and with oil falling again, Chevron could soon have to deal with consistently under-earning its dividend. To maintain its Dividend Aristocrat status, Chevron might well choose to incur debt and make token increases to its payout rather than making a dividend cut, but unless oil rises, the situation could pose a long-term problem for Chevron.
Silver Wheaton is getting tarnished
With a yield of just 1.5%, it might be hard to see Silver Wheaton (NYSE:SLW) as a high-yield stock, but within the mining industry, nearly any dividend qualifies a company as a high dividend payer these days. In early 2013, the company's dividend was nearly triple its current amount, but poor conditions in the silver market since then have led to several dividend cuts over the past two years.
Silver Wheaton's dividend policy looks back at the company's average cash generated by operating activities over the past four quarters. It then takes 20% of that amount and divides it by the number of outstanding shares. The resulting amount, rounded to the nearest cent, becomes Silver Wheaton's payout for the quarter. With silver having fallen to new multi-year lows over the past few months, the odds are increasingly good that Silver Wheaton investors will take another penny hit to their $0.05 per share quarterly dividend in the near future.
Vale continues to feel the Brazilian pinch
International companies aren't immune to adverse conditions affecting their dividends. Brazil's Vale (NYSE:VALE) benefited greatly from the commodities boom, with its production of iron ore and nickel among the largest in the world and with exposure to other products like copper, potash, and aluminum.
Falling commodity prices and economic turmoil in Brazil have crushed the stock, making even its already-reduced dividend work out to a yield of nearly 8%. For now, though, there have been few signs of recovery in the key iron ore market, as steel production demand remains low and so the raw materials that go into its production are too plentiful to push prices higher from their current levels. Investors shouldn't be surprised if Vale moves to conserve even more cash and cut its dividend further.
High yields can lure dividend investors into a false sense of security about a stock, but in many cases, digging deeper shows a good reason why you should think twice before buying. Even if these companies don't end up cutting their dividends, they do carry business risks that could have adverse impacts in other ways, and smart investors need to take those risks into consideration in deciding whether the potential reward is truly worth it.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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