A high-yielding dividend stock can be a great investment — until it isn’t. Just ask Walgreens Boots Alliance shareholders, who last month learned that the company was suspending its dividend. A year before, management slashed the payout. There were warning signs, such as poor earnings numbers, that suggested the payout wasn’t safe despite the company’s previous long track record for regularly increasing its dividend.
There are many other high-yielding stocks out there that may also cut their payouts this year. Three that you’ll want to think twice about buying right now are Innovative Industrial Properties (IIPR 0.76%), Wendy’s (WEN -0.13%), and BCE (BCE -5.54%).
Innovative Industrial Properties
Innovative Industrial Properties (IIP) is a real estate investment trust (REIT) that focuses on the cannabis industry. Its yield looks mouthwatering at nearly 11%. But if investors truly thought that payout was safe, you can be sure they would be buying up shares of the REIT. Instead, its shares have slumped by nearly 40% in the past six months.
Investors aren’t bullish on the cannabis industry’s prospects as hopes for federal legalization have waned. To make matters worse, IIP announced late last year that PharmaCann — a key tenant that accounts for 17% of its rental revenue — had defaulted on all of its leases.
In light of that situation, there are serious questions about whether the REIT will be able to keep supporting its quarterly dividend at $1.90 per share. In Q3 — its most recently reported quarter — Innovative Industrial Properties booked funds from operations per share of $2.02. That doesn’t give it much of a buffer relative to its current dividend, and it may only be a matter of time before it has to cut its payout.
As tempting as IIP’s currently high yield may seem, investors may want to steer clear of the stock given the risks the company faces.
Wendy’s
Fast-food chain Wendy’s yields 6.7% at its current share price. That’s a bit more modest than IIP’s yield, but its payout, too, could prove unsustainable. Over the course of the first nine months of 2024, Wendy’s reported just 2% revenue growth with sales coming in at a little under $1.7 billion.
During that time, the company reported diluted earnings per share (EPS) of $0.71. Wendy’s pays a quarterly dividend of $0.25, which over three quarters would total $0.75 — higher than its EPS. And in two of the past four quarters, the company’s free cash flow has been insufficient to cover its dividend.
Wendy’s dividend is teetering on the edge of not being sustainable, and while management may not cut its payout just yet, if the company’s results don’t improve, it won’t be a surprise if they trim it in the not-too-distant future.
BCE
Canadian telecom giant BCE has long been a stable dividend stock to own. But the company made a big move recently, announcing plans to acquire U.S.-based Ziply Fiber. BCE looks to be eyeing growth opportunities in the U.S. market, but pursuing them is likely to be a costly endeavor.
BCE’s streak of annual dividend hikes has run for well over a decade, but the company has already said it won’t increase its payout this year. Investors are not pleased with that, and the stock has fallen to levels last seen in 2009.
Over the last 12 months, BCE has paid out 3.8 billion Canadian dollars in dividends, which is considerably higher than the CA$3 billion it has generated in free cash flow. Given that it may need more cash in the near future, the dividend, which currently yields nearly 12%, could be headed for a reduction.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Innovative Industrial Properties. The Motley Fool has a disclosure policy.
