Dividend stocks have become investors’ favorites in recent months. Tech turbulence and high-interest rates combined to make high-yield stocks an alternative to riskier equities while still beating the yield on fixed-income investments like treasuries.
Unfortunately, many investors chase the bottom-line yield stat without looking too closely into the underlying company. Dividend stocks are usually seen as mature, stable alternatives to high-flying growth stocks, so fundamentals go overlooked. That’s a critical mistake and could prove deadly to investors overinvested in these three investments.
Altria Group (MO)
Altria Group (NYSE:MO) may be a well-loved favorite for dividend investors, but its future isn’t as assured as before. The tobacco company’s earnings at the beginning of the month barely met analyst expectations, but the moderate top-line improvements point to tough times ahead.
Revenue climbed slightly, to 1.5% year-over-year, but the jump came from price hikes on cigarettes rather than new market expansion. Smokers may be a reliable consumer segment, but excise taxes nationally remain high and keep climbing, and there’s only so much cash Altria can squeeze from existing customers. In fact, actual sales volume fell across the board for Altria.
Overall sales fell 8.7%, and discount cigarette brand sales fell almost 25%. In a constrained economy, even nicotine fiends are considering quitting. The lower-price cigarette slump might be a leading indicator of reduced demand across the board.
Altria’s 8.8% dividend yield is undeniably attractive to income investors. However, the company’s payout ratio is consistently close to 100% of earnings (currently 98.95%). Although dividends payouts come from cash flow — not earnings — Altria’s sales slump indicates that the current outlay isn’t sustainable.
Edison International (EIX)
Edison International (NYSE:EIX) is one of the nation’s best-performing utility companies, primarily due to sustainable energy innovation and expansion. That growth plan sets it apart from comparable mature firms with limited innovation prospects. But Edison is still facing fallout from its $2.2 billion fire claims that may drag on future dividend payouts.
The company’s August 7th earnings report referenced those liabilities. While the good news is that much of the cost is paid out, the company has yet to execute cost recovery. In all likelihood, that will come through price hikes passed to the customer. Although utility customers often have no say in metered pricing or a realistic alternative, there will likely be regulatory or government pressure to funnel cash toward cost recovery. That prospect could eat into dividend payouts.
Edison’s current dividend yield is 4.21%. But, with a 117% payout ratio and looming uncertainty, the company’s future dividend prospects remain unclear.
Boston Properties (BXP)
There’s an ongoing fight between employees and corporations over returning to the office, and Boston Properties (NYSE:BXP) might suffer from the fallout. After the pandemic proved that remote roles are viable long-term, new remote and hybrid jobs continued climbing. That means less need for corporate office space as companies go fully remote or work out arrangements to share office space for hybrid work operations.
Boston Properties, an office space owner and manager in key locations like New York, Boston, San Franciso and others, will lose the most if trends continue. The company’s real estate portfolio isn’t very diversified beyond these core office locations. In fact, BXP is facing the fallout already, as the occupancy rate dropped year-over-year, and management projects a fairly slim 88% rate for the remainder of 2023.
Metropolitan office spaces are among the costliest to maintain as taxes, security and utilities are priced sky-high compared to residential or smaller-scale ventures. Those costs remain no matter the occupant rate. Therefore, as remote workers flee the big cities and leave buildings vacant, BXP’s expenses will continue accumulating without revenue to offset the staggering maintenance costs.
BXP’s dividend yield is 6.14% right now, with a 92% payout ratio. But as cash starts flowing into maintaining unused properties, that yield may prove unsustainable.
On the date of publication, Jeremy Flint did not hold any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
