High yields aren’t everything. Yes, finding stocks with 10%+ yields can be very enticing, and in some cases, it's sustainable. But time and again, I’ve seen such companies fall from their highs, and, in many cases, cut the dividend. Slavik Kolesnik, a Portfolio Manager at Leader Capital, has noticed the same thing.
“It’s not a hard rule,” Kolesnik says, “but in many cases, stocks with high yields go down, and stocks with low yields go up. Yeah, I mean, you want to pay attention to the yield, but it can be a red flag as well.”
That’s why looking at the bigger picture is important, especially when considering income stocks. And one of the most reliable ways to judge if a company’s dividend is sustainable is to look at its payout ratio. So today, I’ll screen for companies that pay high dividends, far more than their earnings can accommodate.
How I Came Up With The Following Stocks
Using Barchart’s Stock Screener tool, I set the following filters to get today’s list of stocks to avoid:
- Dividend Payout Ratio: 80% or more. The dividend payout ratio shows the proportion of a company's earnings paid to shareholders as dividends. High payout ratios are bright red flags, and 100% or more means the company is either borrowing or dipping into its cash reserves to pay dividends. It is not a good look, and it usually indicates that the stock is in for a price drop in the near future when the company inevitably slashes its dividend payments.
- Current Analyst Ratings: 1 (Strong Sell) to 2.4 (Moderate Sell).
- Annual Dividend Yield: Left blank.
After running the screen, I got 14 results. Here they are, arranged according to highest to lowest dividends on a trailing twelve-month period:
You’ll notice that I excluded Carlyle Secured Lending (CGBD) from the list. While it’s technically the “highest rated” company on this screen with a high payout ratio, I left it out because it’s a business development company, and they are legally required to pay a minimum of 90% of their earnings as dividends to shareholders. So it’s natural they’ll have a high ratio.
With that out of the way, let’s discuss three companies to avoid despite their high yields, starting with the one with the highest:
Kohl's Corp (KSS)
Kohl's Corporation is an omnichannel retail company that operates a nationwide chain of department stores offering apparel, footwear, home goods, and accessories. It focuses on providing value-driven shopping experiences through exclusive brands, partnerships, and a strong digital presence. The company has over 1,100 stores across the US and launched a loyalty program in 2020 to improve customer experience.
Kohl’s Q3 2024 financials had some terrible news for investors. Net sales decreased 8.8%, while EPS ended at 20 cents per share. Meanwhile, the company pays 50 cents per share quarterly—that’s more than double its earnings. In no way is that a sustainable business practice and I predict that Kohl’s will cut its dividends, perhaps soon, and its stock price will follow. Analysts seem to agree, rating it a moderate sell.
Xerox Corp (XRX)
I remember Xerox during its heyday, and its stock price went through the roof during the run-up to the dot-com bubble - which is admittedly, I began investing. Unfortunately for Xerox, it never truly managed to recover after that. Xerox specializes in digital printing, document management, and workplace solutions. It provides printers, software, and services that help businesses streamline workflows and automate document processes. Xerox has a global presence and is working with ITsavvy to integrate AI with its products and solutions.
The company’s FY’24 financials reported a 9.7% decrease in revenue and a $1.32 billion net loss. Removing the one-time goodwill impairment charge brings its adjusted EPS to 97 cents for the year. It also continues bleeding money, with operating and free cash flow decreasing YOY.
Meanwhile, the company announced a 25-cent quarterly dividend that it frankly cannot afford right now. So, while Xerox’s 12.4% yield might be attractive to you now, I don’t think it will keep paying that for much longer.
Cricut Inc Cl A (CRCT)
Cricut Inc. is a technology company that designs and sells smart cutting machines, software, and accessories for DIY crafting. Its products enable users to create personalized projects using paper, vinyl, fabric, and wood. The company also offers a subscription-based platform through Cricut Access, with design tools, templates, and premium content to enhance creativity.
Unlike the other two companies on this list, Cricut is new to paying dividends, only having paid two starting in 2024, one of them a special dividend four times its recurring semi-annual commitment of 10 cents per share. That brings its TTM yield to over 10%, which might make investors consider it for their income portfolio.
However, this situation underscores why due diligence is non-negotiable in stock investing. The company’s TTM yield might be 10%, but the forward yield is only 3.33% based on its predictable 20-cent annual payout. Yes, they might pay special dividends in the future, but given that its Q3 2024 diluted EPS was a measly 5 cents per share, I say that’s unlikely any time soon.
Final Thoughts
Numbers can be skewed in anyone’s favor. Case in point: these stocks have double-digit yields, yet their underlying business is can’t cover their payouts. Given their low prices and high yields, I can see how they may look like great finds. However, I say investing in companies with reliable cash flow and consistent dividend growth is better than settling for high-yielding stocks that are likely to crash.
