If you are an income investor, you have to find companies that can keep paying the dividends that back their dividend yields. Usually, as yields get higher, the certainty of this ability diminishes. So while TC Pipelines, LP (TCP), Barnes & Noble, Inc. (BKS), and CenturyLink, Inc. (LUMN -3.17%) all have relatively large yields, danger is lurking and none should be seen as a sure thing for investors seeking reliable dividend stocks.
1. Parent issues
TC Pipelines owns midstream energy infrastructure. That's usually a pretty steady business that throws off material cash that can support hefty distributions. However, a rule change from the Federal Energy Regulatory Commission (FERC) is set to materially trim the partnership's revenues. To get ahead of the issue, TC Pipelines cut its distribution by 35% in early 2018. Not surprisingly the shares fell on the news. They remain down by around 35% so far this year.
Image source: Getty Images.
This is where things get extra ugly. TC Pipelines is controlled by general partner TransCanada, which has historically used the partnership as a source of funding. Essentially, TransCanada would sell midstream assets to TC Pipelines to raise capital it could invest elsewhere while still retaining control of the assets because it, effectively, runs TC Pipelines. TC Pipelines benefits because new assets spur growth and the ability to increase distributions.
Because of TC Pipeline's low unit price today, TransCanada has stated that it doesn't view it as a viable source of funding. That puts a serious dent in TC Pipeline's growth prospects since it means no more asset sales from its parent. The partnership even hinted that it may have to cut the distribution again when it reported second-quarter earnings. With so much uncertainty, income investors should look elsewhere despite TC Pipeline's attractive 7.9% distribution yield.
2. Trying hard to change
Barnes & Noble, one of the nation's largest booksellers, is another company where danger is lurking for dividend investors. The story should be pretty familiar by now. This brick-and-mortar retailer wasn't prepared for the swift and dramatic shift customers made toward online purchases. It has been trying to adjust, but the transition to a new model hasn't been going well. The company has lost money in six of the last 10 years. And, perhaps more troubling, earnings were negative in the 2017 holiday season -- the period of the year when retailers generally make most of their money.
BKS EPS Diluted (Quarterly) data by YCharts.
But Barnes & Noble has continued to pay a dividend of $0.60 per share per year since 2016. That dividend, coupled with a low share price, which reflects the company's ongoing business struggles, has lead to an enticing 9.6% dividend yield. The problem is that the bookseller still doesn't appear to have figured out a way to deal with shifting customer habits and intense competition from companies like Amazon. Until it proves that it has done that (via rising sales and consistently positive earnings, for example), investors shouldn't assume that the dividend is secure.
3. A debt-heavy balance sheet
CenturyLink currently yields around 9.2%. The telecom is in the process of absorbing its 2017 purchase of Level 3 Communications. That acquisition shifted CenturyLink's business toward business customers, which many consider an astute decision. In fact, the most recent quarterly results suggest that it's making good progress on the integration front.
CTL Financial Debt to EBITDA (TTM) data by YCharts.
However, the Level 3 deal required a massive increase in debt. Over the last 18 months, CenturyLink's long-term debt has roughly doubled. Interest expenses, meanwhile, have increased by 70%. Quarterly revenue has only gone up 40% over the same time. If this merger doesn't work out as planned, CenturyLink's dividend will likely be one of the first things to go.
Although the market is clearly pricing a negative outcome into the over 9% yield here, investors looking for reliable dividends would be better off elsewhere for now. That's especially true if you lean toward the conservative side, even though some industry watchers, including Motley Fool's Jamal Carnette, think the fears are overblown.
Too much uncertainty
At the end of the day, TC Pipelines, Barnes & Noble, and CenturyLink are offering big yields because of the uncertainty surrounding their ability to continue paying dividends at current levels. Each is facing clear and present dangers that suggest investors looking for reliable dividends would be better off elsewhere. If you need the income your portfolio generates, taking on the risks here just isn't worth it.
