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Beware of Dangerous Dividends

Editor's note: As part of our partnership with Nightly Business Report, TheStreet's David Peltier will join NBR Monday (check local listings) to look at two dividend stocks to avoid.

Dividends are an investor's best friend. According to Standard & Poor's, over the past several decades, about 40% of the total return of the S&P 500 can be attributed to the reinvestment of dividends.

Case in point, over the past five years (ended Aug. 31), the S&P 500 had a simple return of 53.5%. That number jumps up to nearly 88% over the same period, if the dividends are consistently reinvested throughout.

In general, I believe investors should focus on the companies that use solid earnings to support consistent dividend growth. Several blue-chip names have raised their payout every year for the past few decades. As a rule of thumb, I like to see earnings that are at least twice as much as the annual dividend.

Even so, investors need to be cautious and not just chase the highest yields out there. If a security is yielding 8% when the S&P 500 yields 2%, there is added risk involved that should be understood before making any purchase.

With that in mind, I recently searched for outsized dividends that could be in danger. These payouts are either in peril of being cut, or the underlying stock may underperform the broader market and eliminate the benefit of the income.

In my opinion, Pitney Bowes (PBI - Get Report) is the poster child of a dividend in peril. The company, which is best known for its postage meters, actually has a rich history of paying dividends, having raised its payout every year since 1983.

That said, recent action in the stock suggests the market believes this streak could soon come to an end. The shares are down 24%, year-to-date, and are currently changing hands around $14.14 (which works out to a 10.7% dividend yield, based on the quarterly payment of $0.375 a share).

Pitney's 2012 consensus earnings estimate of $2.02 a will allow management to cover the annual dividend 1.3x. However, the company's earnings are expected to decline the next three years; which should come as little surprise to anyone who's been keeping up to date with the current financial state of the U.S. Postal Service.
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