If you are investing in dividend stocks, the last thing you want to see is a company cutting its payout. But sometimes cuts have to be made, and during this period of corporate cost-cutting we may see many dividend cuts.
Some investors hold dividend stocks because they need regular income that the companies provide. Other investors prefer to reinvest dividends to buy more shares over time as part of a long-term growth strategy, with increasing payouts an important factor. Both strategies are explored below, followed by a screen of dividend stocks with high yields and some safety indicated by cash-flow estimates.
V.F. Corp.
VFC,
the maker of popular apparel brands, including The North Face, Timberland, Vans and Dickies, lowered its quarterly dividend by 41% when it announced its quarterly results on Feb. 7. In the company’s earnings press release, interim CEO Benno Dorer said V.F. was shifting priorities “by reducing the dividend, exploring the sale of noncore assets, cutting costs and eliminating nonstrategic spend, while enhancing the focus on the consumer through targeted investments.”
V.F. Corp’s stock is still up 4% this year, and the shares have only fallen slightly since the dividend cut was announced. Then again, the stock is down 52% from a year ago, with dividends reinvested. CFRA analysts upgraded the stock to a “buy” rating on Feb. 8, writing in a note to clients that “downside risk is limited for shares at these levels and expect Vans to return to growth in FY 24.”
What makes this a fascinating example of a company cutting its dividend is that V.F. is included in the S&P 500 Dividend Aristocrats Index
SP50DIV,
This index is made up of all the companies in the benchmark S&P 500
SPX,
that have raised their regular dividends for at least 25 consecutive years.
The S&P 500 Dividend Aristocrats Index is reconstituted annually and rebalanced to be equally-weighted quarterly. So next January, V.F. Corp will be removed from the list.
Dividend stocks for growth
Continuing with the S&P 500 Dividend Aristocrats Index, it makes no difference how high a stock’s current dividend yield might be. Among the 67 Aristocrats, yields range from 0.28% (West Pharmaceutical Services
WST,
) to 5.23% (Walgreens Boots Alliance Inc.
WBA,
).
The ProShares S&P 500 Dividend Aristocrats ETF
NOBL,
is weighted to match the holdings and performance of the index. NOBL has a dividend yield of 2.3%, compared with a yield of 1.5% for the SPDR S&P 500 ETF Trust
SPY,
So even though NOBL has a higher dividend yield than SPY does, it is really a long-term growth strategy. Here are total returns for both for the past five years, with dividends reinvested:
FactSet
SPY has outperformed NOBL over the past five years, and maybe this should not be a surprise because of the remarkable run-up for the largest technology companies through the bull market through 2021. Another reason for SPY’s outperformance is that its annual expenses come to a low 0.0945% of assets under management, compared with an expense ratio of 0.35% for NOBL.
NOBL was established in October 2013, so we don’t yet have a 10-year performance record. Let’s go back to the indexes. For 10 years, the S&P 500 has come out slightly ahead, with a total return of 232% against a 229% return for the S&P 500 Dividend Aristocrats.
Now look at a 15-year chart for the indexes:
FactSet
The S&P 500 Dividend Aristocrats, as a group, have shown that this has been a viable growth strategy for a 15-year period that has included several market cycles. It has also required patience, underperforming during the liquidity-driven bull market through 2021.
Dividend stocks for income
If you hold shares of NOBL over the long term, your dividend yield based on your original cost will rise, as the companies increase their payouts. But there are various strategies used by mutual funds and exchange-traded funds to produce more income. These articles include examples covered recently:
- These 2 dividend-stock ETFs are more like growth funds in disguise. Can either still work in your income portfolio?
- This dividend-stock ETF has a 12% yield and is beating the S&P 500 by a substantial amount
But many investors still wish to hold their own stocks with high yields to produce regular income. For these investors, the risk of dividend cuts is an important consideration. A drastic dividend cut might mean you need to replace lost income. It can also crush a stock price, making it difficult to decide whether to get out immediately or wait for the share price of a dividend cutter to recover.
What can you do to protect yourself from the possibility of a dividend cut?
One way is to look at projected free cash flows. A company’s free cash flow (FCF) is its remaining cash flow after capital expenditures. It is money that can be used to pay dividends, buy back shares, expand or for other corporate purposes that will hopefully benefit shareholders.
If we divide a company’s expected FCF per share for a 12-month period by its current share price, we have an estimated FCF yield. This can be compared with the dividend yield to see whether or not there is “headroom” to increase the dividend. The more the headroom, the less likely it may be that a company will be forced to lower its payout.
For most companies in the financial sector, especially banks and insurers, FCF information isn’t available. But in these heavily regulated industries, earnings per share can be a useful substitute to make similar headroom estimates. We also used EPS for real-estate investment trusts that engage mainly in mortgage lending.
For real estate -investment trusts that own property and rent it out (known as equity REITs), we can make similar use of funds from operations (FFO), a non-GAAP figure commonly used to gauge dividend-paying ability in the REIT industry. FFO adds depreciation and amortization back to earnings, while netting-out gains on the sale of property. This can be taken further with adjusted funds from operations (AFFO), which subtracts the estimated cost to maintain properties the REITs own and rent out.
In the case of V.F. Corp, the company’s annual dividend payout before the cut on Feb. 7 was $2.04 a share, which would have made for a yield of 7.15%, based on the closing price of $28.52 that day. Analysts polled by FactSet expect the company’s FCF per share for calendar 2023 to total $1.98, for an estimate FCF yield of 6.94%. So the company wasn’t expected to be able to cover the dividend yield with free cash flow this year.
Much more went into V.F. Corp.’s decision to cut the dividend, but this type of analysis provided a useful indicator.
A new dividend stock screen
Even before Intel Corp.
INTC,
announced its weak fourth-quarter results and predicted a difficult first quarter, the company’s dividend yield appeared threatened, because full-year free cash flow estimates for 2023 and 2024 were negative. Intel’s stock has a dividend yield of 5.03% and the company hasn’t announced a dividend cut. But there may be plenty of pressure to make a cut as the company is laying off workers and making other moves to lower expenses.
This inspires a two-year look ahead at expected FCF yields for calendar 2023 and 2024. We’re using adjusted calendar-year estimates from FactSet, because many companies have fiscal years that don’t match the calendar.
For a broad list, we began with the S&P Composite 1500 Index
SPX,
which is made up of the S&P 500, the S&P 400 Mid Cap Index
MID,
and the S&P Small Cap 600 Index
SML,
Among the S&P 1500, there are 84 stocks with dividend yields of at least 5.00%.
We then narrowed the list to companies for which consensus estimates for free cash flow per share were available for 2023 and 2024, among at least five analysts polled by FactSet. As explained above, we used EPS for financial firms for which FCF estimates aren’t available and for mortgage REITs, and AFFO for equity REITs.
Here are the 15 companies with the highest dividend yields that have estimated headroom above the dividends based on estimates for 2023 and 2024:
| Company | Ticker | Dividend Yield | Estimated 2023 FCF yield | Estimated 2024 FCF yield | Estimated 2023 headroom | Estimated 2024 headroom |
| Coterra Energy Inc. |
CTRA, |
10.26% | 15.21% | 13.60% | 4.95% | 3.34% |
| Hanesbrands Inc. |
HBI, |
10.03% | 19.90% | 22.58% | 9.87% | 12.54% |
| Uniti Group Inc. |
UNIT, |
9.57% | 28.55% | 29.11% | 18.98% | 19.54% |
| Devon Energy Corp. |
DVN, |
8.31% | 15.09% | 10.06% | 6.78% | 1.75% |
| EPR Properties |
EPR, |
7.65% | 11.43% | 11.86% | 3.78% | 4.21% |
| New York Community Bancorp Inc. |
NYCB, |
6.75% | 10.79% | 12.18% | 4.04% | 5.43% |
| Verizon Communications Inc. |
VZ, |
6.44% | 9.86% | 11.34% | 3.42% | 4.90% |
| Kinder Morgan Inc. Class P |
KMI, |
6.07% | 8.80% | 9.15% | 2.73% | 3.08% |
| AT&T Inc. |
T, |
5.77% | 11.42% | 12.29% | 5.66% | 6.52% |
| Outfront Media Inc. |
OUT, |
5.76% | 9.68% | 10.95% | 3.91% | 5.19% |
| Simon Property Group Inc. |
SPG, |
5.72% | 8.80% | 9.05% | 3.08% | 3.33% |
| Northwest Bancshares Inc. |
NWBI, |
5.54% | 8.10% | 8.13% | 2.55% | 2.59% |
| Kilroy Realty Corp. |
KRC, |
5.44% | 8.60% | 8.54% | 3.16% | 3.10% |
| Macerich Co. |
MAC, |
5.11% | 10.14% | 10.61% | 5.03% | 5.50% |
| Lincoln National Corp. |
LNC, |
5.08% | 24.75% | 27.30% | 19.67% | 22.22% |
| Source: FactSet | ||||||
Click on the tickers for more about each company.
Click here for Tomi Kilgore’s detailed guide to the wealth of information for free on the MarketWatch quote page.
All the REITs on the list (UNIT, EPR, OUT, SPG,KRC and MAC) are equity REITs. Mortgage REITs are facing difficult times in the rising interest rate environment, as residential lending volume has cratered.
This analysis doesn’t encompass dividend cuts that have already been made. For example, AT&T Inc.
T,
cut its dividend by 47% in February 2022 after it completed its deal with Discovery (now Warner Bros. Discovery Inc.
WBD,
) to shed most of its WarnerMedia segment. AT&T’s current dividend yield of 5.77% appears well-supported by estimated free cash flows for 2023 and 2024.
Another example of a recent dividend-cutter on the list is Simon Property Group Inc.
SPG,
the mall operator that lowered its payout by 38% during the Covid-19 doldrums in June 2020.
The indicated dividend headroom numbers are significant, but if you are interested in any of the stocks listed here, you should do your own research to decide whether or not you expect the companies to remain competitive and to grow their businesses over the next decade.
Don’t miss: Biden targets stock buybacks — do they help you as an investor?
If you are investing in dividend stocks, the last thing you want to see is a company cutting its payout. But sometimes cuts have to be made, and during this period of corporate cost-cutting we may see many dividend cuts.
Some investors hold dividend stocks because they need regular income that the companies provide. Other investors prefer to reinvest dividends to buy more shares over time as part of a long-term growth strategy, with increasing payouts an important factor. Both strategies are explored below, followed by a screen of dividend stocks with high yields and some safety indicated by cash-flow estimates.
V.F. Corp.
VFC,
the maker of popular apparel brands, including The North Face, Timberland, Vans and Dickies, lowered its quarterly dividend by 41% when it announced its quarterly results on Feb. 7. In the company’s earnings press release, interim CEO Benno Dorer said V.F. was shifting priorities “by reducing the dividend, exploring the sale of noncore assets, cutting costs and eliminating nonstrategic spend, while enhancing the focus on the consumer through targeted investments.”
V.F. Corp’s stock is still up 4% this year, and the shares have only fallen slightly since the dividend cut was announced. Then again, the stock is down 52% from a year ago, with dividends reinvested. CFRA analysts upgraded the stock to a “buy” rating on Feb. 8, writing in a note to clients that “downside risk is limited for shares at these levels and expect Vans to return to growth in FY 24.”
What makes this a fascinating example of a company cutting its dividend is that V.F. is included in the S&P 500 Dividend Aristocrats Index
SP50DIV,
This index is made up of all the companies in the benchmark S&P 500
SPX,
that have raised their regular dividends for at least 25 consecutive years.
The S&P 500 Dividend Aristocrats Index is reconstituted annually and rebalanced to be equally-weighted quarterly. So next January, V.F. Corp will be removed from the list.
Dividend stocks for growth
Continuing with the S&P 500 Dividend Aristocrats Index, it makes no difference how high a stock’s current dividend yield might be. Among the 67 Aristocrats, yields range from 0.28% (West Pharmaceutical Services
WST,
) to 5.23% (Walgreens Boots Alliance Inc.
WBA,
).
The ProShares S&P 500 Dividend Aristocrats ETF
NOBL,
is weighted to match the holdings and performance of the index. NOBL has a dividend yield of 2.3%, compared with a yield of 1.5% for the SPDR S&P 500 ETF Trust
SPY,
So even though NOBL has a higher dividend yield than SPY does, it is really a long-term growth strategy. Here are total returns for both for the past five years, with dividends reinvested:
FactSet
SPY has outperformed NOBL over the past five years, and maybe this should not be a surprise because of the remarkable run-up for the largest technology companies through the bull market through 2021. Another reason for SPY’s outperformance is that its annual expenses come to a low 0.0945% of assets under management, compared with an expense ratio of 0.35% for NOBL.
NOBL was established in October 2013, so we don’t yet have a 10-year performance record. Let’s go back to the indexes. For 10 years, the S&P 500 has come out slightly ahead, with a total return of 232% against a 229% return for the S&P 500 Dividend Aristocrats.
Now look at a 15-year chart for the indexes:
FactSet
The S&P 500 Dividend Aristocrats, as a group, have shown that this has been a viable growth strategy for a 15-year period that has included several market cycles. It has also required patience, underperforming during the liquidity-driven bull market through 2021.
Dividend stocks for income
If you hold shares of NOBL over the long term, your dividend yield based on your original cost will rise, as the companies increase their payouts. But there are various strategies used by mutual funds and exchange-traded funds to produce more income. These articles include examples covered recently:
- These 2 dividend-stock ETFs are more like growth funds in disguise. Can either still work in your income portfolio?
- This dividend-stock ETF has a 12% yield and is beating the S&P 500 by a substantial amount
But many investors still wish to hold their own stocks with high yields to produce regular income. For these investors, the risk of dividend cuts is an important consideration. A drastic dividend cut might mean you need to replace lost income. It can also crush a stock price, making it difficult to decide whether to get out immediately or wait for the share price of a dividend cutter to recover.
What can you do to protect yourself from the possibility of a dividend cut?
One way is to look at projected free cash flows. A company’s free cash flow (FCF) is its remaining cash flow after capital expenditures. It is money that can be used to pay dividends, buy back shares, expand or for other corporate purposes that will hopefully benefit shareholders.
If we divide a company’s expected FCF per share for a 12-month period by its current share price, we have an estimated FCF yield. This can be compared with the dividend yield to see whether or not there is “headroom” to increase the dividend. The more the headroom, the less likely it may be that a company will be forced to lower its payout.
For most companies in the financial sector, especially banks and insurers, FCF information isn’t available. But in these heavily regulated industries, earnings per share can be a useful substitute to make similar headroom estimates. We also used EPS for real-estate investment trusts that engage mainly in mortgage lending.
For real estate -investment trusts that own property and rent it out (known as equity REITs), we can make similar use of funds from operations (FFO), a non-GAAP figure commonly used to gauge dividend-paying ability in the REIT industry. FFO adds depreciation and amortization back to earnings, while netting-out gains on the sale of property. This can be taken further with adjusted funds from operations (AFFO), which subtracts the estimated cost to maintain properties the REITs own and rent out.
In the case of V.F. Corp, the company’s annual dividend payout before the cut on Feb. 7 was $2.04 a share, which would have made for a yield of 7.15%, based on the closing price of $28.52 that day. Analysts polled by FactSet expect the company’s FCF per share for calendar 2023 to total $1.98, for an estimate FCF yield of 6.94%. So the company wasn’t expected to be able to cover the dividend yield with free cash flow this year.
Much more went into V.F. Corp.’s decision to cut the dividend, but this type of analysis provided a useful indicator.
A new dividend stock screen
Even before Intel Corp.
INTC,
announced its weak fourth-quarter results and predicted a difficult first quarter, the company’s dividend yield appeared threatened, because full-year free cash flow estimates for 2023 and 2024 were negative. Intel’s stock has a dividend yield of 5.03% and the company hasn’t announced a dividend cut. But there may be plenty of pressure to make a cut as the company is laying off workers and making other moves to lower expenses.
This inspires a two-year look ahead at expected FCF yields for calendar 2023 and 2024. We’re using adjusted calendar-year estimates from FactSet, because many companies have fiscal years that don’t match the calendar.
For a broad list, we began with the S&P Composite 1500 Index
SPX,
which is made up of the S&P 500, the S&P 400 Mid Cap Index
MID,
and the S&P Small Cap 600 Index
SML,
Among the S&P 1500, there are 84 stocks with dividend yields of at least 5.00%.
We then narrowed the list to companies for which consensus estimates for free cash flow per share were available for 2023 and 2024, among at least five analysts polled by FactSet. As explained above, we used EPS for financial firms for which FCF estimates aren’t available and for mortgage REITs, and AFFO for equity REITs.
Here are the 15 companies with the highest dividend yields that have estimated headroom above the dividends based on estimates for 2023 and 2024:
| Company | Ticker | Dividend Yield | Estimated 2023 FCF yield | Estimated 2024 FCF yield | Estimated 2023 headroom | Estimated 2024 headroom |
| Coterra Energy Inc. |
CTRA, |
10.26% | 15.21% | 13.60% | 4.95% | 3.34% |
| Hanesbrands Inc. |
HBI, |
10.03% | 19.90% | 22.58% | 9.87% | 12.54% |
| Uniti Group Inc. |
UNIT, |
9.57% | 28.55% | 29.11% | 18.98% | 19.54% |
| Devon Energy Corp. |
DVN, |
8.31% | 15.09% | 10.06% | 6.78% | 1.75% |
| EPR Properties |
EPR, |
7.65% | 11.43% | 11.86% | 3.78% | 4.21% |
| New York Community Bancorp Inc. |
NYCB, |
6.75% | 10.79% | 12.18% | 4.04% | 5.43% |
| Verizon Communications Inc. |
VZ, |
6.44% | 9.86% | 11.34% | 3.42% | 4.90% |
| Kinder Morgan Inc. Class P |
KMI, |
6.07% | 8.80% | 9.15% | 2.73% | 3.08% |
| AT&T Inc. |
T, |
5.77% | 11.42% | 12.29% | 5.66% | 6.52% |
| Outfront Media Inc. |
OUT, |
5.76% | 9.68% | 10.95% | 3.91% | 5.19% |
| Simon Property Group Inc. |
SPG, |
5.72% | 8.80% | 9.05% | 3.08% | 3.33% |
| Northwest Bancshares Inc. |
NWBI, |
5.54% | 8.10% | 8.13% | 2.55% | 2.59% |
| Kilroy Realty Corp. |
KRC, |
5.44% | 8.60% | 8.54% | 3.16% | 3.10% |
| Macerich Co. |
MAC, |
5.11% | 10.14% | 10.61% | 5.03% | 5.50% |
| Lincoln National Corp. |
LNC, |
5.08% | 24.75% | 27.30% | 19.67% | 22.22% |
| Source: FactSet | ||||||
Click on the tickers for more about each company.
Click here for Tomi Kilgore’s detailed guide to the wealth of information for free on the MarketWatch quote page.
All the REITs on the list (UNIT, EPR, OUT, SPG,KRC and MAC) are equity REITs. Mortgage REITs are facing difficult times in the rising interest rate environment, as residential lending volume has cratered.
This analysis doesn’t encompass dividend cuts that have already been made. For example, AT&T Inc.
T,
cut its dividend by 47% in February 2022 after it completed its deal with Discovery (now Warner Bros. Discovery Inc.
WBD,
) to shed most of its WarnerMedia segment. AT&T’s current dividend yield of 5.77% appears well-supported by estimated free cash flows for 2023 and 2024.
Another example of a recent dividend-cutter on the list is Simon Property Group Inc.
SPG,
the mall operator that lowered its payout by 38% during the Covid-19 doldrums in June 2020.
The indicated dividend headroom numbers are significant, but if you are interested in any of the stocks listed here, you should do your own research to decide whether or not you expect the companies to remain competitive and to grow their businesses over the next decade.
Don’t miss: Biden targets stock buybacks — do they help you as an investor?
