It’s no secret that I love dividend stocks. These investments allow me to sit back and relax as consistent income comes in. Sure, they’re not as exciting as the price swings of fast-moving stocks. But today, anything that allows me to earn money while maintaining my peace of mind is worth having.
That’s also the reason why I’m partial to Dividend Aristocrats. As a quick reminder, Aristocrats are dividend-paying companies that belong to the S&P 500 and have consistently increased their dividend payments for at least 25 years.
Now, I don’t just blindly invest in all stocks that belong in the Dividend Aristocrat lists. I have my own list of qualifications, and since we’re talking about dividend income, one of the major considerations when choosing an Aristocrat is its dividend payout ratio.
What Does High Dividend Payout Ratios Mean?
The dividend payout ratio is calculated by dividing the company’s dividend payout per share by its earnings per share, or EPS. This allows us to determine how much of the company’s earnings are paid to its shareholders.
Dividend payout ratios are important because they give us a better idea of the company’s ability to continually increase its dividend payouts over the long run. Experts agree that a 35% to 55% dividend payout ratio is in the “healthy” range. A range like this gives the company a bit of headroom for future increases while keeping some of its earnings to invest in itself.
Unfortunately, the companies on this list have exceedingly high dividend payout ratios, which makes me question their ability to continue increasing payouts. Infact, if a company has >100% payout ratio, then it means they are paying the dividend from either cash on hand or borrowed funds; either one isn't sustainable.
If you're a dividend growth investor, companies that may not increase their dividends should be on the shortlist to potentially sell. Therefore, I created this shortlist of 3 Dividend Aristocrats to sell.
Stanley Black & Decker Inc (SWK)
First on the list of Dividend Aristocrats to sell is Stanley Black & Decker Inc. This diversified company manufactures, markets, and sells tools and equipment for construction and carpentry as well as electronic solutions for security and healthcare facilities.
SWK is quite special in the dividend investing space. It’s one of the handful of companies boasting a Dividend Aristocrat, Dividend King, and Dividend Zombie status. The company has paid dividends for 147 consecutive years and has increased each annual payout for 56 of them.
Unfortunately, earnings-wise, things aren’t looking too good. SWK’s full-year report indicates that 2023 ended at a $1.88 GAAP EPS loss. Despite that, the report expressed optimistic guidelines for 2024, with GAAP EPS expected to fall between $1.60 and $2.85. However, Stanley Black & Decker pays a $3.23 annual dividend (translated to a 3.37% yield). This means the company could be on the hook to pay approximately between $1.63 and $0.38 more per share to shareholders than they make.
When all is said and done, SWK’s current 225.63% dividend payout ratio is a cause for concern.
Clorox Company (CLX)
The Clorox Company is a multinational conglomerate that offers products ranging from grilling products to cat food to disinfectants (which the company is mainly known for). One thing I like about the company is that, like 3M, it has a diversified product portfolio that includes both consumer staples and discretionary products. This gives the company’s revenue streams some protection against cyclical fluctuations.
However, product demand is not always a sure sign of profitability, especially in a competitor-heavy market. Clorox has also gotten into some hairy situations this last year. First, a cyberattack in August 2023 caused a 6% decrease in sales volume for the following six months, costing the company about 16 cents per share in Q2’24 alone. The quarter’s bottom line also took a $1.04 hit in the form of a non-cash settlement charge, though that’s not likely to recur.
But getting to the crux of the issue, Clorox has an 81.25% dividend payout ratio, which is too high for my taste. Also, its liabilities have also been creeping higher and higher over the past year - which translates to higher interest costs down the line. Granted, the company has always had high payout ratios, ranging from 55% to 122% over the past ten years, and the forward dividend rate is on the higher end at 3.25% or $4.80, which usually goes up in the middle of the year.
Meanwhile, the company sees 2024 diluted earnings falling between $3.06 and $3.26 per share, making it likely that Clorox will again exceed 100% in payout ratios next year.
Fastenal Company (FAST)
Fastenal Company offers wholesale distribution of a wide range of industrial supplies and tech solutions, such as construction supply vending machines and inventory management measures. That said, the company offers a lower 2.34% yield or a $1.82 dividend rate, unlike the other two companies.
However, its current 88.05% payout ratio doesn’t look good on paper. Another concern is that analysts expect 2024’s EPS to end at $2.15, which means the payout ratio will get, at best, a marginal improvement but still stay above 80%. It also doesn’t help that the company has a majority hold rating based on the analyst consensus.
Final Thoughts
A good rule of thumb is always considering the larger context when evaluating financial and investment metrics. High yields are great to look at, especially for income investors. Still, suppose the company struggles to keep up the status quo with their dividend payments. In that case, you might be better served looking at other Dividend Aristocrats with relatively higher yields at lower payout ratios to keep your portfolio’s overall growth prospects strong.
On the date of publication, Rick Orford did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
