High-yield dividend stocks always get income investors excited, but the last thing you want is to buy a stock right before it cuts a lucrative dividend payout. Below, you'll find a few high-yielding dividend investments that look like they might deserve a place in your income portfolio, but you should take into account some of the potential pitfalls that could derail their ability to sustain their current quarterly dividends.
Marathon Oil's dividend well could dry up
The oil patch has been a hotbed of dividend-cutting activity lately, as companies try to adjust their capital strategies to preserve their balance sheets in the face of plunging prices for crude oil and natural gas. Thus far, Marathon Oil (NYSE:MRO) has avoided reducing its payout, but its more than 4% yield could be in danger in the near future.
The main trouble is that Marathon's earnings have taken a big hit from the drop in oil prices, as the company has actually lost money for two straight quarters, and only income from discontinued operations helped it make a profit in the fourth quarter of 2014. Even worse, unlike some of its energy-sector peers, most of Marathon's losses aren't related to massive impairment charges but rather to ordinary operating expenses. Even on a free cash flow basis, Marathon has had trouble reaching break-even lately. Until Marathon can demonstrate that it can sustain profitability at current energy prices, it'll be tough to defend a dividend payout at current levels.
Mattel's dividend is playing with fire
Toymaker Mattel (NASDAQ:MAT) is well-known for its dolls and games, but the stock's nearly 7% dividend yield is serious business for income investors. For a long time, though, shareholders have nervously watched as weak earnings sent the company's payout ratio above the 100% mark. Mattel has struggled as key franchises like Barbie, Fisher Price, and Hot Wheels haven't been able to deliver the fundamental strength that investors want to see to feel confident that the toymaker can sustain its current dividend for the long run.
Mattel is set to announce its latest results on Thursday, and if the company's financials don't show marked improvement, the prospects for a reduced payout will only get larger. Yet investors expect a nearly 20% drop in earnings per share, and even forward estimates for the full 2016 year are lower than the current dividend. All told, Mattel will have to surprise investors with strong growth to justify a dividend at present levels.
ETF dividends can drop too
Many investors use exchange-traded funds to invest in stocks across an entire industry or covering a complete sector. The Energy Select SPDR ETF (NYSEMKT:XLE) has an above-average yield of around 3%, which stands out from many of its sector ETF peers. Yet investors need to remember that ETFs themselves don't set their dividend payouts. Instead, they simply collect the dividends that their component stocks pay out, and then turn around and send dividend distributions of their own to their ETF shareholders.
Indeed, looking at the Energy SPDR ETF's dividend payouts, you can see that the third-quarter payout for September was already less than the two dividends from earlier in 2015. Unlike individual stocks, any cut in the SPDR ETF's dividend will likely be modest, as most of the ETF's component stocks haven't made any changes to their dividend policies. Nevertheless, investors need to watch closely to make sure that their energy ETF holdings don't sap their income at exactly the wrong time.
Keep your eyes open for dividend cuts ahead
Unfortunately, companies aren't always able to keep paying the dividends that shareholders get used to receiving from them. When that happens, the damage to a stock price can be substantial. By being vigilant and preparing for potential dividend cuts before they happen, smart dividend investors can make decisions about whether they want to ride out the inevitable turbulence that comes after a dividend cut or get out before any bad news becomes official.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.