Investing in dividend-paying stocks is a smart way to build lasting wealth. However, as seasoned investors know: Not all dividend stocks are created equal. The trick isn't finding stocks with the highest dividend yields, but rather investing in companies with reliable payouts that don't run the risk of cutting their dividends down the road. Below, three Motley Fool contributors explain why Nokia (NOK 0.90%), CenturyLink (LUMN -0.93%), and Windstream (WINMQ) could slash their dividends in 2015.
Dan Caplinger (CenturyLink): The telecommunications sector has always been a hotbed for high dividend yields, and over the years, rural telecoms have done an especially good job of rewarding their shareholders. Yet one high-yielding telecom stock, CenturyLink, has the potential for cutting its dividend for a second time, and while that might not be bad news for long-term investors, those who are seeking current income could be in for disappointment.
In early 2013, CenturyLink made a move that crushed income investors, cutting its dividend by roughly 25%. Yet unlike some of its rural telecom peers, CenturyLink's dividend cut wasn't out of necessity but rather from a conscious decision to shift some of its capital allocation strategy away from dividends toward more productive uses of cash. Reducing its payout wasn't popular among those who rely on portfolio income, but it nevertheless gave the company greater flexibility to pursue different strategic options.
With poor earnings results to start out 2015 and questionable forward guidance, CenturyLink might face pressure to reduce its dividend one more time. Still, with CenturyLink's valuation at relatively low levels even for the telecom industry, even a dividend cut might not be enough to make the stock any less attractive than it is right now -- at least to those who don't rely on quarterly dividend checks being as large possible.
Anders Bylund (Nokia): Finnish telecom infrastructure specialist Nokia is almost guaranteed to cut its dividend payouts within the next couple of years -- again. This 2% yield is not built to last.
Don't take my prediction as an insult to Nokia or its investors. There's nothing fundamentally wrong with the company, its chosen target market, or the global telecom environment as a whole. It's just that the company's board of directors isn't interested in protecting or raising dividends no matter what. Instead, the company keeps a light hand on its dividend policy, ready to divert dividend-earmarked funds into other projects as needed.
This is not news. Longtime Nokia investors have seen this before, and are unlikely to panic when it happens. Committing to ceaseless dividend increases year after year tends to add a Dividend Aristocrat premium to share prices. Nokia isn't aiming for this, or even pretending to.
This attitude is more widespread in Europe than in America. Hence, companies can qualify for S&P's European Dividend Aristocrat index by raising payouts for 10 years. The American version sets the bar much higher, at 25 years.
The frequent dividend cuts you see in the chart below may look like a series of disasters from an American point of view, in stark contrast to the small but relentless increases an American telecom like AT&T will deliver. But it's actually standard operating procedure in Europe.
So yes, Nokia will almost certainly slash its dividend again -- and that's perfectly fine. Just make sure to adjust your expectations for this stock accordingly.
NOK Dividend data by YCharts
Tamara Walsh (Windstream): Income investors love rural telecommunications company Windstream for its sky high dividend yield, which currently clocks in at more than 13%. Not only is that the largest yield of any company in the telecom sector, but also it's markedly above the S&P 500 average dividend yield of just 2.02%. On the surface, this seems like an easy way to earn a great return on your investment dollars. However, a closer look reveals that Windstream may be forced to cut its dividend.
For starters, Windstream paid out more in dividends last year than it earned. The company, for example, paid $1 per share in dividends in 2013, yet only generated full-year earnings of $0.35 per share. Common sense tells us this is not something that can be maintained over the long-term.
To be fair, Windstream's ability to generate free cash flow in recent years has helped the company pay down debt and kept its dividend afloat up to this point. That said, there isn't much cash left over for Windstream to adequately invest in its business, and with mounting competition from cable companies now offering phone services, Windstream may need to ramp up CapEx going forward. By increasing its CapEx, Windstream would likely be forced to slash its dividend.
The company's weak balance sheet is another reason for concern. In addition to being one of the most debt-ridden companies in the telecommunications services industry, Windstream's current operating profit and assets are not enough to offset its ongoing debt obligations. Analysts now expect Windstream to generate a loss of $0.02 per share in fiscal year 2015, down from earnings of $0.06 per share a year ago. As a result, shareholders shouldn't be surprised when Windstream is forced to follow in fellow telecom giants Frontier and CenturyLink's footsteps and slash its dividend.
