If you’re looking for dividend stocks to buy, it can be tempting to look for ones which offer high yields. But the danger is that usually the high yield comes with a catch. The dividend may not sustainable, or the business may be facing some considerable challenges ahead.
One stock which pays an unusually large yield today is retailer Kohl’s (NYSE:KSS). At a little over 9%, investors have the potential to collect a fairly significant payout from this stock. Investing around $11,000 would be enough to earn you $1,000 in dividends over the course of a full year. But just how safe is that dividend?
A common way to evaluate a dividend is to look at a stock’s payout ratio, which compares its dividend per share and its earnings per share. In the trailing 12 months, Kohl’s diluted earnings per share is $2.48. That means its payout ratio is around 81%. But what’s concerning is that the company posted a net loss in its most recent quarter, so that payout ratio, which isn’t all that low to begin with, could worsen if Kohls continues to post underwhelming results in future quarters.
Another way to consider the dividend safety is by looking at the free cash flow. In the trailing 12 months, Kohl’s reported free cash flow of $754 million versus $220 million that it paid out in dividends. But last quarter, free cash flow was a negative $133 million.
The safe and prudent thing for investors to do at this point would be to take a wait-and-see approach with the stock to see if Kohl’s results improve. Amid some challenging macroeconomic conditions, a retail stock may not be the safest option for income investors to be holding right now, especially one with Kohl’s concerning numbers.
