The biggest danger of investing in a dividend stock is that its payouts won’t continue. Sometimes it can come without warning while other times there could be hints along the way, including poor earnings results or a very high payout ratio.
In some cases, it can actually have a positive impact on a stock if investors may have been suspicious that a dividend was not sustainable and where cash flow was a concern. But for dividend investors, there’s nothing worse than hearing that a dividend has been cut because normally when it happens, it’s not a modest adjustment.
That’s what happened to investors of Medical Facilities Corporation (TSX:DR) recently. The company released its quarterly results in early November, and sales declined 2% from the prior year and net income was down 22%. The company also recorded an impairment charge of $22 million. And with a payout ratio of well over 100%, the company has decided to not only change its dividend payments from monthly to quarterly but the annual dividend will now be $0.28 rather than $1.125.
The news has had a disastrous impact on the stock, with Medical Facilities seeing its share price fall by 40% in the days following the earnings release, and it has now hit a new all-time low. The problem with the stock was that outside of its dividend, there was little reason to consider investing in it. Although the company posted a profit in Q3, the two previous quarters landed in the red.
It’s been an inconsistent stock and investors were taking a risk investing in it. It’s a reminder of why it’s important to always look at a dividend as a bonus, and not let it be the sole reason for investing in a company.
How can investors avoid getting burned by a dividend cut?
As tempting as it may be to lock in a high yield, the safer route often involves going for a more modest dividend. A stock like Rogers Communications Inc (TSX:RCI.B)(NYSE:RCI) is a good example of a much safer dividend stock to invest in. With a modest payout ratio of around 50% and Rogers generating free cash flow of $1.5 billion over the past four quarters, the company is in an excellent position to continue paying its dividends.
In addition, Rogers is also a lot more versatile than Medical Facilities in that its operations are much more diversified and it’s not reliant on just one key business. That’s where Rogers is a good long-term investment even without factoring in its dividend. And that’s what makes the stock a good buy, as it offers much more than just a good payout.
Investors may even be able to snag Rogers stock at a deal given that it has fallen by more than 9% year to date. An adjustment to the company’s forecast has sent the stock into a bit of a tailspin as its unlimited data plans have proven to be a lot more popular than expected, and that’s having a negative impact on its guidance. Nonetheless, over the long term, there’s little doubt that Rogers will continue generating strong results.
Renowned Canadian investor Iain Butler just named 10 stocks for Canadians to buy TODAY. So if you’re tired of reading about other people getting rich in the stock market, this might be a good day for you.
Because Motley Fool Canada is offering a full 65% off the list price of their top stock-picking service, plus a complete membership fee back guarantee on what you pay for the service. Simply click here to discover how you can take advantage of this.
Fool contributor David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns shares of MEDICAL FACILITIES CORP.