5 Large-Cap Stocks with High Dividend Payout Ratios
By: Ned Piplovic,
Income-seeking investors generally hunt for large-cap stocks with the highest yields to maximize their dividend income flow. However, because high yields often represent outsized risks or financial troubles, investors also should consider other measures of financial performance, such as the Dividend Payout Ratio.
The dividend payout ratio represents the total amount of dividend distributions paid to shareholders relative to the company’s total earnings or net income. Generally, a low dividend ratio indicates that the company has enough earnings to support future dividend distributions or sustain a rising dividend payout policy, which investors value highly. Alternatively, a high payout ratio is a sign that the company is providing most of its earnings as dividends and that even a minor financial hiccup could force a reduced dividend distribution or eliminate the dividend distributions outright.
A payout ratio above 100% would be acceptable only if earnings are lower than expected or negative for a short period because of an unusual event like an unplanned acquisition, a lawsuit judgment or a natural disaster. Otherwise, a company must dip into other funding sources to cover the excess distributions above 100% of earnings.
Generally, a dividend payout ratio of approximately 30% to 50% indicates that the company provides sustainable dividend distributions and retains sufficient funds to support its operations and finance expansion activities.
The list below includes five major companies with a market capitalization of more than $10 billion, whose current dividend payout ratio exceeds 80%. While all five companies have delivered asset appreciation and rising dividend payouts for at least the last five years, the high payout ratio raise some concerns regarding the ability of these businesses to maintain their streaks of consecutive dividend boosts going forward.
The large-cap stocks below are sorted by their payout ratio in ascending order.
5 Large-Cap Stocks with High Dividend Payout Ratios: #5:
The Coca-Cola Company (NYSE:KO)
Market Capitalization: $243 billion
Dividend Payout Ratio: 88%
While above the 50% upper limit of the sustainable range, the current 88% payout ratio is below the 175% five-year average and significantly below the 270% very high dividend payout ratio from just slightly more than one year ago. Despite the high dividend payout ratio, the Coca-Cola Company has maintained its record of boosting annual dividend payouts for the past 57 consecutive years. The company’s most recent boost was a 2.5% hike in the first quarter of 2019. This increase brought the annualized dividend amount to $1.60, which currently yields 2.8%. Despite the payout boost, the current yield is below the company’s 3.18% average yield over the past five years.
The positive aspect is that the yield decline resulted from a steady asset appreciation. While declining slightly entering into the trailing 12 months, the share price has risen steadily since early-March 2019. The $56.70 closing price on January 15, 2020. Marked capital gains of nearly 21% over the past year and combined total returns exceeded 22.5%. Additionally, the company also delivered total re returns of more than 50% over the past three years.
5 Large-Cap Stocks with High Dividend Payout Ratios: #4
Extra Space Storage, Inc. (NYSE:EXR)
Market Capitalization: $14.2 billion
Dividend Payout Ratio: 112%
The company’s current 112% payout ratio might seem a reason to raise concern among investors. However, as a self-administered and self-managed real estate investment trust (REIT), Extra Space Storage must distribute at least 90% of its annual earnings as dividend distributions to maintain its favorable status and carry zero corporate income tax liability. The current payout is in line with the company’s 108% five-year average.
While the high dividend payout ratio might appear to be a sign of trouble, analysis of the company’s other financial and performance measures, offers a significantly more positive outlook. The company has boosted its annual dividend distribution amount for the past 10 consecutive years, Over that period, the annual distribution amount advanced more than nine-fold for an average dividend growth rate of more than 25% each year.
Furthermore, the share price nearly doubled over the past five years and also advanced almost 20% over the trailing 12-month period. The share price and rising distributions combined for a 23.5% one-year total return. Additionally, shareholders also enjoyed total returns of 65% and 91% over the last three and five years, respectively.
5 Large-Cap Stocks with High Dividend Payout Ratios: #3
ONEOK, Inc. (NYSE:OKE)
Market Capitalization: $31.4 billion
Dividend Payout Ratio: 117%
ONEOK’s current high dividend payout ratio of might look like sigh of potential troubles. However, at its current level, that payout ratio is significantly lower than the company’s own 169% payout ratio average over the last five years. This indicates that ONEOK’s payout ratio is moving in the right direction. Aside from the apparently high payout ratio ONEOK’s performance offers reassuring signs that the company is in a good position to continue delivering strong returns.
The company has offered dividend distributions since 1939 and has hiked its annual payout 18 times in the past two decades. This includes the current streak of uninterrupted consecutive annual hikes over the past 18 years, as well as distribution hikes over the last nine consecutive quarters.
In addition to the steadily expanding dividend income distributions, ONEOK also has rewarded its shareholders with asset appreciation and low share price volatility. Stakeholders realized total returns of nearly 32% over the last year and 53% over the past three years. Over the last five years, shareholders more than doubled their investment with a total return of 116%.
5 Large-Cap Stocks with High Dividend Payout Ratios: #2
Mid-America Apartment Communities, Inc. (NYSE:MAA)
Market Capitalization: $15 billion
Dividend Payout Ratio: 169%
Mid-America Apartment Communities focuses on ownership, management, acquisition and development quality apartment communities in the Southeast, Southwest and Mid-Atlantic regions of the United States.
As another REIT on this list, MAA must distribute most of its earnings to enjoy the tax benefits. But, unlike the 112% payout ratio by Extra Space Storage that is only slightly higher than 100%, MAA’s payout ratio is significantly higher. The 169% payout ratio indicated that MAA currently pays out as dividend distributions 70% more that its total earnings. However, the current payout might just be a spike as the company’s five-year payout average is 136%, which is still high but closer to the acceptable range.
However, MAA’s other metrics are favorable and indicate that investors just monitor the high dividend payout ratio for signs of long-term advancement and enjoy existing returns, which were nearly 39% over the past 12 months. Longer-term returns were 51% over the last three years and 86% over the last five years.
5 Large-Cap Stocks with High Dividend Payout Ratios: #1
The Procter & Gamble Company (NYSE:PG)
Market Capitalization: $314 billion
Dividend Payout Ratio: 188%
The current payout ratio of 188% is significantly higher than the company’s five-year average of just 94%, which indicates a one-time spike due to distribution of assets in additional to earnings. Aside from the current high dividend payout ratio, Procter & Gamble’s operational and financial performance offers an image of stable growth company with steady long-term returns. The company has paid a dividend since 1891 and has boosted its annual distribution for the past 66 consecutive years Just over the past two decades, the annual payout increased 345%, which corresponds to an average annual growth rate of 7.7%.
In addition to the rising dividend income payouts, the company’s share price nearly doubled over the past five years and advanced 38% just over the past 12 months. With extraordinary asset appreciation and steady dividend growth, the company’s shareholders enjoyed total returns of 40% over the past year and 60% over the past three years. A share price correction in early 2015, limited the total return over the last five years to 56%.
A high dividend payout ratio is generally a warning sign that the company might have to cut or eliminate dividend distributions altogether. However, investors should consider whether the high payout ratio is the only negative indicator among positive signs that otherwise show the security in a favorable light. In each of the stocks on this list, investors should keep an eye on the payout ratio to ensure that the situation is improving to be able to enjoy the rewards of total returns from these five securities.
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Ned Piplovic is the assistant editor of website content at Eagle Financial Publications. He graduated from Columbia University with a Bachelor’s degree in Economics and Philosophy. Prior to joining Eagle, Ned spent 15 years in corporate operations and financial management. Ned writes for www.DividendInvestor.com and www.StockInvestor.com.