If You Own Any of These Dividend Favorites, Your Income May be in Jeopardy

Large-cap dividend payers are usually thought of as safe stocks. These are typically companies in an industry with loyal customers, like drug companies or phone companies. But while this may have been a sound strategy for generating income in the past, some large-cap, high-yield stocks could deliver large losses to investors in the next few years.

Starting with drug stocks, the numbers show investors could be disappointed. The table below shows the yield and payout ratios of some of the largest drug companies in the world. The payout ratio is the percentage of earnings allocated to dividends. High payout ratios indicate the company dedicates most of its resources to dividends and has little money left to invest in the growth of the company.

Analysts expect these three companies to grow earnings slowly over the next few years, giving them little room for increasing dividends, since dividends are paid from earnings. When a payout ratio tops 100%, as it does for BMY, a cut is possible, although it seems unlikely that BMY will cut its dividend if it meets earnings estimates. (more)


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