Warning on High Dividend Yields

In a recent advisory, Piper Sandler has cautioned investors to be more discerning when selecting stocks with high dividend yields, particularly in light of the current earnings season, which has shown strong performance from major technology firms. The firm emphasized the importance of assessing the sustainability of dividend payments amid a challenging labor market and mixed earnings reports. To identify potentially vulnerable dividend stocks, Piper Sandler analyzed S&P 500 dividend payers using a specific formula that evaluates the "ability-to-sustain ratio." This ratio, calculated by subtracting preferred dividends and capital expenditures from cash flow and then dividing by common dividends, indicates financial health. A ratio below 1 raises red flags for the firm, suggesting a risk of dividend cuts. Among the stocks flagged for concern is Walgreens Boots Alliance, which has experienced a staggering 60% decline in share value this year. The company faced significant setbacks, including a record drop of over 22% following disappointing fiscal third-quarter earnings and plans to close underperforming stores. Currently, 14 out of 20 analysts recommend holding the stock, with only two suggesting a buy. Another stock of interest is Oneok, which boasts a dividend yield of 4.7% and an ability-to-sustain ratio of 0.93. Despite its concerning ratio, Oneok has seen a notable increase in share price, rising over 20% this year, following a positive second-quarter earnings report and an upward revision of its full-year revenue forecast.