Greenberg: Dividends at Risk of Being Cut

NEW YORK ( TheStreet) -- The risk of dividends, especially those with high yields, is that they can be cut. And sometimes cut more than once.

And the trend toward cutting appears be on the rise.

So far this year, according to Standard & Poor's, there have been 287 dividend cuts. That compares with 121 at the same time last year.

Keep in mind there have been 2,010 dividend increases so far this year, up from a year earlier.

But the risk of cuts should never be minimized, especially of the highest-yielding companies and/or those who use most, if not all, of their cash flow to make the quarterly payment.

"In a rising rate environment there are companies people have been hiding in for the dividends but the dividends aren't as safe as they thought it was," says Brad Lamensdorf, who, along with John Del Vecchio, runs the AdvisorShares Ranger Active Bear ETF. The fund shorts stocks based on earnings quality and other fundamental issues. (Disclosure: I'm an investor.)

Their portfolio has 52 stocks. Of those, they believe at least four are at the biggest risk of dividend cuts. The names and their rationale:

Diebold ( DBD), best known for its ATM machines: In August the company sliced full-year expectations to $1.30 to $1.40 a share from $1.80. Almost all of its cash is domiciled in foreign countries. The trouble, Lamensdorf and Del Vecchio say, is that they expect its free cash flow to be a negative $25 million, but dividend payments are $75 million. "While they may raise debt to fund the dividend," they say, "there's much "safer" dividend plays out there. Why own Diebold when you can own Johnson & Johnson, for example?"

CenturyLink ( CTL): This telecom company has already cut its dividend once this year. With revenue last quarter down 2%, following a string of declines -- and pension costs likely to rise -- another cut would appear likely. "This business is under intense pressure and the income statement is being squeezed," they say.

Windstream ( WIN): "Free cash flow barely covers dividend," Lamensdorf and Del Vecchio say, alluding to one of the biggest risks to dividends. "In 2009 to 2010 there was a $400 million surplus. Then a $200 million surplus. Then no surplus in 2011, and just $30 million in 2012." That was followed by a $40 million shortfall in the first half of this year. On top of that, they claim, the telecom company's "prior cash flow was overstated on a sustainable basis due to reduction in funding for post retirement obligations." Oh, and they also say the pension is underfunded by $400 million.

Consolidated Communications ( CNSL): In 2012 the telecom company "achieved a low shortfall of $16 million in free cash flow versus dividend payments after accounting for debt payments. Cash balance is the lowest in the company's history."

Reality Check

Investors often get lulled into a sense that dividends are sacrosanct -- and to many companies they are.

David Peltier, portfolio manager of TheStreet's Dividend Stock Advisor newsletter, says that Diebold has raised its dividend for 60 consecutive years, most recently in February. He told me he understands Lamensdorf and Del Vecchio's reasoning on Diebold, "but I'd guess that management will try to defend that dividend for the time being." (Or as long as they can.)

As for CenturyLink, he says the stock "had a big fall" when the company cut its dividend last time around. Windstream, meanwhile, "has always been a high-yielder that I always avoided because I thought the payout was at risk."

As for Consolidated? "I don't know much about it but it'll be hurt if the previous two are."

Investors, beware.

-- Written by Herb Greenberg in San Diego

Herb Greenberg, editor of Herb Greenberg's Reality Check, is a contributor to CNBC. He does not own shares, short or trade shares in an individual corporate security.

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