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Investors are in love with dividend stocks this year – and there are even more juicy yields to choose from than before.
But one thing you need to be careful to avoid is a dividend stock that boasts a huge yield, but can't sustain it.
For example, look at CenturyLink Inc. (NYSE: CTL). CTL has been a favorite dividend stock for years, but slashed its dividend by 26% in February. The move caught investors off guard. Shares plunged 23% in one day – the biggest one-day decline since at least 1980 – wiping out about $6 billion in market value.
The stock still yields nearly 6%, but confidence in the company to maintain its payout has been damaged.
Positive dividend actions have far outweighed negative announcements over the past few years. In 2013's first quarter, 732 companies boosted their payouts compared with 552 in the year-earlier period.
But in March, 73 U.S. companies pruned their payouts – not far off the record of 93 in December 2012.
Usually companies frame dividend cuts as necessary evils – necessary as in the cut was needed to conserve cash. Read those tea leaves and it's easy to realize that if a company needs to cut its dividend to conserve capital, it probably is not worth investing in in the first place.
The good news is investors can skirt stocks that are vulnerable to dividend reductions. We rounded up a few names that deliver tempting yields, but look like they could be on the way to cutting their payouts.
Three Dividend Stocks Headed for Lower Yield
Exelon Corp. (NYSE: EXC): In the first quarter, utilities were one of the top-performing sectors. That serves as further proof that investors love the idea of decent yields and low volatility under one umbrella.
Exelon, the Chicago-based nuclear power firm, gives investors both a yield of 6% and a beta of just 0.53.
Not to mention the stock is up nearly 18% this year and that is, quite frankly, a jaw-dropping ascent for a utilities stock in less than four months.
But investors can't ignore these issues with Exelon…
First, nuclear power is not in high demand.
Then there is interest-rate risk. Rising rates crimp capital-intensive utilities by elevating borrowing costs for these companies. It is not uncommon to see utilities cut dividends in high interest rate environments.
Even without higher interest rates, Exelon could be a dividend cutter, and soon. Citing Morningstar, Barron's reported in December that Exelon could reduce its annual dividend to $1-$1.50 a share from the current level of $2.10 per share.
Portugal Telecom (NYSE: PT): Portugal Telecom last year cut its dividend in half, saying it wanted to reduce debt and increase financial flexibility.
That's why, with the added volatility investors have to deal with in Europe, ignoring the 14.1% yield on Portugal Telecom (NYSE ADR: PT) is wise. Yes, Goldman Sachs recently upgraded the stock to "Conviction Buy" from "Neutral," but that was before news of a court decision on Portugal's finances.
A Portuguese court recently struck down austerity measures the country needs to balance its budget. That means already fragile Portugal faces a budget shortfall. Portugal has been previously bailed out by the European Union and International Monetary Fund.
So just weeks after Cyprus sent a chill down investors' spines by freezing bank accounts and seizing deposits, it looks like Portugal could do the same thing.
If Portugal's ills are not enough to keep you away, consider that Morgan Stanley recently singled out Portugal Telecom as a prime candidate for a dividend cut.
NutriSystem Inc. (Nasdaq: NTRI): This purveyor of weight-loss products and services hasn't slashed a dividend recently – but it hasn't raised its payout, either.
On the surface, this stock looks like a dividend investor's dream: A single-digit price tag with a 9.2% yield. The company carries no debt and began paying a dividend in 2008.
But remember, the price and yield only got to where they are through share price depreciation.
In the case of NutriSystem, the share-price declines have been rapid. The shares are off more than 26% in the past year and almost 8.5% in the past month as increased competition has weighed on the stock. The company reported a fourth-quarter earnings-per-share loss and the same is expected for the first quarter.
The five-year average yield on this stock is 5%, so the company could really take the ax to its payout and still have a nice yield. Since the stock is sinking, management could take the near-term pain of a dividend cut to rebuild long-term confidence in the stock.
Bottom line: Stick to the companies that are sharing more money with investors, not pulling back.
Now for the dividend stocks you want in your portfolio: 10 Dividend Stocks to Buy Now