Danger Lurks for These 3 High-Yield Dividend Stocks

By Markets Fool.com

If you want a dividend stock that yields substantially more than the broader market's 2%, you likely have to take on some added risk. Of course, in some of these cases income investors can expect the elevated dividend not only to persist, but also to grow over time.

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Yet in many instances dividend yields reach unusually high levels because investors don't see them continuing to expand, and a payout cut may even be in the cards.

Below, I'll highlight a few high-yield dividends, from Seagate , Staples , and Kohl's , that don't seem well supported by the companies' finances and business trends.

Metric

Seagate

Staples

Kohl's

Dividend yield

11%

6%

6%

Payout ratio

224%

86%

63%

Source: S&P Global Market Intelligence.

Seagate: 11% dividend yield

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The nearly 60% plunge in its share price is the main reason why Seagate's dividend yield has spiked to double digits from 7% at the start of 2016. A weak selling environment recently produced the digital storage specialist's first quarterly loss in years as demand for smaller-capacity drives sinks and high-capacity sales aren't rising at a fast enough pace to offset the slump. Add a costly reorganization into the mix, and it's no wonder that Seagate's payout ratio has spiked to well over 100% of earnings.

STX Free Cash Flow Per Share (TTM) data by YCharts.

Things look better when you judge the dividend against free cash flow. The company generated over $3 per share in cash over the past year, compared to the $2.52 per share it is paying out in dividends annually. Still, cash production is trending sharply lower: Operating cash fell 40% last quarter. Seagate can withstand that hit while continuing to pay out its dividend, but if demand doesn't improve sufficiently to send cash flow higher, it's just a matter of time before management chooses to slice the payout so that it can keep investing in the business.

Staples: 6% dividend yield

There's a good reason why specialty retailer Staples hasn't boosted its dividend in years: Comparable store sales have been trending lower since 2013 even as a shrinking store base pressures overall revenue. Now, with the proposed merger with Office Depot off the table, the company can't even count on streamlined operations to help it deal with customers flocking to the internet to make their purchases.

Image source: Getty Images.

Annually, Staples pays out about $300 million in dividends, which is only slightly less than its average net income over the past three fiscal years. Meanwhile, its free cash flow is trending lower, suggesting shareholders aren't likely to see a dividend boost this year, either. Add it all up and income investors are better off looking elsewhere for their dividend-growth needs.

Kohl's: 6% dividend yield

Kohl's hasn't been able to protect its business from an industrywide drop in customer traffic. Revenue and profitability both declined last quarter as comps fell and Kohl's was forced to lower prices to clear out inventory. Gross profit margin is at a 10-year low, which helps explain why the stock is down to levels investors haven't seen since 2009.

KSS Gross Profit Margin (TTM) data by YCharts.

Thanks to solid expense management, the dividend is fairly well protected. In fact, it accounted for less than two-thirds of earnings over the last year. There is every reason to expect that ratio to keep climbing, though, as the company revamps its strategy to deal with fundamental shifts in the industry. New initiatives include adding digital delivery options and pushing off-price selections. Still, it's clear that management has enough challenges to deal with over the next few years so increasing capital returns to shareholders might not be top priority.

The article Danger Lurks for These 3 High-Yield Dividend Stocks originally appeared on Fool.com.

Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.