These “Safe” Dividend Stocks Could Cut Their Dividends...

The other day, we reviewed four high yield stocks that are paying out sustainable yields, and the majority of these stocks are companies that get very little traditional analyst coverage. So, naturally, they're not very wellnown. We looked at some MLPS, BDC's, and even preferred shares. And we found that it is possible to find stocks yielding 7, 8, or even 9% with sustainable dividends, and the stocks still have upside. But today, we're going to be doing the complete opposite. We're going to be looking at stocks that almost all investors know and actually many investors own in their portfolio. Some of them are even dividend king stocks with 50 consecutive years of dividend increases. But these stocks are actually not safe dividend payers right now. And we're going to look at their capital allocation to prove this. So, let's go ahead and look at three examples. 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We can see it's trading at its lowest price in the last 5 years, a PE multiple of 15.54. And if we look at the dividend metrics for Pepsi, what we can see is the stock is now yielding 4.26%. So that yield is really starting to climb higher. And put that into just a little bit of perspective, look at the historical dividend yield for Pepsi here on Seeking Alpha. This is the highest yield the company has had in the last 5 years. And it actually doesn't even stop there. The highest yield in the last 10 years for this stock. So when you combine the highest yield in the last 10 years and the lowest valuation multiple in the last 5 years as well, you can see why all of a sudden people think Pepsi stock looks like an incredible opportunity. I mean, we're talking about a stock that has grown its dividend payments for over 50 consecutive years, making it a dividend king stock. Typically, that's the definition of a safe dividend payer. But keep in mind, none of those metrics actually tell us how sustainable the dividend payouts are. Typically, that's the surface level metrics that people look at and automatically assume the dividends are safe. Let me give you an example. Back in February of 2024, so over 2 years ago, almost 2 and 1/2 years ago, I wrote an article on 3M stock back when this company was a dividend king. And I titled it, "A dividend cut is needed and could be imminent." And I got a lot of push back for this article because 3M had been growing dividend payments for over 60 consecutive years. Look at just a few of the comments I got. None of them were harsh or mean by any means. But people didn't understand how a dividend cut could be possible for this type of stock that's been growing dividend payments for over 60 consecutive years. But just a few months later, a dividend cut is exactly what happened. And right now, we're seeing some of the warning signs happen for Pepsi as well. some of the same warning signs that I saw with 3M. And let me show you exactly what I mean. To start, jump over to the dividend breakdown sheet. Look at just the free cash flow payout ratio. This is why it's a mistake to simply look at the earnings payout ratio because dividends are paid out of free cash flow, the true cash flow that's coming into the business, the operating cash flows minus capital expenditures. And take a close look at this. We can see in 2025, the company used 99.5% of its free cash flow to pay out dividends. So essentially all of its free cash flow was used to pay out dividends. The exact same thing is true in 2024. In fact, the free cash payout ratio in 2024 was above 100% 100.5%. In 2023, free cash covered the dividends, but it was high. It was sitting at about 84% and in 2022 the free cash payout ratio was 110%. So basically for the last four years, Pepsi has used all of its free cash flow to pay out dividends. Now, remember the five capital allocation options that a company has? They can reinvest back into the business, pay down debt, mergers and acquisitions, buy back shares, or pay out dividends. The reality is if they're using all their free cash flow simply to pay out dividends, then they can't do any of those other options. At least in theory, they can't without weakening the balance sheet. And this is where things get interesting because Pepsi has made mergers and acquisitions specifically with Poppy over the last couple of years. So naturally, if they're using all their free cash flow to pay out dividends and they're still making acquisitions, that means they're having to dip into the debt markets. In other words, the balance sheet is weakening. And here's what's even more concerning potentially in my opinion. Jump over to their recent earnings report where they issued 2026 guidance and outlook. Make note of a couple things. Organic revenue is only projected to increase by around 2 to 4%. Only 2 to 4%. That's already quite slow. But if we zoom out and look at the profitability sheet, what you'll see is that's even slower than their already slow 10-year revenue kagger, which was sitting at 4%. So, not is free cash flow already in a very difficult situation. Revenue growth really isn't helping with it coming in at about 2 to 4%. And keep in mind, that's really just in line with inflation, perhaps even lower. So, in real purchasing power terms, you could argue that topline growth is now in reverse. Here's what's also concerning. The free cash flow conversion ratio will be sitting at about 80%. That's what they're expecting in 2026. Now, what does that mean? And let's put it into a little bit of perspective. Well, if we jump over to our free cash flow analysis sheet, I've already plugged in Pepsi stock. Come over here, and you can see our free cash flow conversion. Let's zoom in and take a bit of a closer look right here. Free cash flow conversion. This is basically telling us what percent of earnings the company is actually translating into free cash flow. And in 2025, it was 93% which typically is relatively strong. 93% of the earnings were translated into free cash flow. However, what they just told us is that in 2026 it should be sitting at around 80%. So that means less of their earnings are getting translated into free cash flow. So organic revenue growth is nearly non-existent particularly in terms of purchasing power and their margins at least free cash flow ratio will be even lower in 2026. And on top of this total cash returns to shareholders of approximately 8.9 billion. So they're going to pay out 7.9 billion in dividends which we can see right now they're not generating enough free cash flow to cover that. But on top of that, they're also pursuing sherry purchases of around 1 billion, which again comes out of their free cash flow. So just to cover dividends and share buybacks, they would need to produce about 8.9 billion in free cash flow, which for reference over the last few years, they've not come anywhere close to that number. And I don't see any reason to believe free cash flow will be growing to that number over the next year. So to put it very simply, Pepsi is trading at a 5-year low for a reason. A lot of retail investors are getting sucked into what they think looks like a massive opportunity, where the starting yield is the highest it's been in years and where the valuation looks quite attractive. But the reality is there are some red flags for Pepsi stock right now that even make me believe that dividend could be at risk over the next few years unless something dramatic changes. Now, keep in mind this isn't a death sentence for Pepsi. Things could turn around. Maybe if the economy starts doing better, top lines will grow, free cash will start to grow, and we'll see the dividend be safe, and the share price start to recover. But based on the current circumstances, Pepsi is not a stock I would add to my portfolio. In fact, in my personal portfolio, I own Coca-Cola, and I've explained the reasoning behind this before, and it's done really well so far, up 17.38% year-to date and up 17% in the last year. And obviously, that's not including the dividends, which pushes those total returns closer to 20%. And of course, the dividends are sustainable. Next on the list, we have Fizer stock. And this is another high yielder, as you already know if we look at them on the dividend breakdown sheet. And what you'll see is Fizer is now yielding close to around 7%. And again, this is another example where the starting yield is significantly higher than what we've historically seen. It's one of the highest yields for this company in the last 5 years. and really even in the last 10 years. And at the exact same time, they're trading at what looks like a dirt cheap valuation. The average PE multiple over the last 3 years for them is about 10.7. Now, they're all the way down to just 8.7 times earnings. So, it's trading like a stock that's essentially not growing any whatsoever. So, let's talk about the dividend for just a moment. Like we saw, yielding close to 7%. But again, this is another example where the free cash flow metrics are quite concerning. Already off the bat, we can see, yes, a history of dividend growth, but free cash flow is really not covered the dividend over the last 3 years. You can see in 2025, the dividends paid out was about 9.7 billion, while free cash flow generated was just 9 billion, giving them a free cash payout ratio of 107%. And it was relatively close in 2024. And in 2023, they definitely did not cover the dividend. In fact, the free cash payout ratio was up to 192%. Now, we can see where the CO boom happened in 2021 and 2022, which were record-breaking years for the stock, and you can see this in the share price as well. It got all the way up to around $60 a share in late 2021. But then, free cash flow came back to reality, and it's really not even covering the dividend anymore. Now the caveat to all of this is if free cash flow and earnings growth is projected to ramp back up if they have a strong pipeline considering this is a pharmaceutical stock then that dividend can end up being sustainable. So what are analysts projecting in terms of earnings growth for a stock like fizer? Well let's look at the earnings estimate tab here on seeking alpha and scroll down. we can see earnings in 2026 projected to decline in 2027 projected to decline 2028 2029 projected to decline. Now it's true that when you're talking about a pharmaceutical stock again just one blockbuster drug can change the trajectory of this stock for even a decade but it's very hard to project out future cash flows past the next 3 to four years. So, it's absolutely possible that they do return to growth at some point, but it's difficult to project without really deeply understanding the pipeline, which I think you could argue potentially only the insiders know and maybe not even them. Now, if we dig deeper into their capital allocation, they gave us a little bit of guidance in their recent earnings report. One of the things you'll notice is that the terminology surrounding their dividend payouts has changed. It's no longer continuing to grow the dividend. It's about maintaining and growing the dividend. Notice the change in terminology there. They're becoming more focused on just maintaining the dividend. Maybe you won't see that much growth moving forward, which I wouldn't expect, especially since dividend growth has slowed down to below 2% in just the last 5 years. Something else we have to point out that's relatively ironic is they're no longer pursuing share buybacks. Now, if you've been watching the channel for a while, you know that share buybacks can potentially be a great way to reward shareholders. And in fact, it can technically increase the amount that companies are paying out in dividends on a per share basis. And the math behind that's relatively simple. For example, jump over to the stock screener and look at Fizer. Now, what we can see is back in 2015 to around 2019, the company was actively buying back shares, which when you're reducing the shares outstanding, even if earnings, revenue, and free cash flow are stagnant on a per share basis, they can continue to grow. The same is true with the dividend payouts. But we can see share buybacks are now not really going anywhere. In fact, the opposite has happened over the last few years. They've slightly diluted their shareholders in order to raise capital really to do things like simply maintain the dividend. This is when you start to dive into the weeds. You start to notice some interesting yellow flags. Now, remember, share buybacks are most effective when you're buying back the stock at an undervaluation. And Fizer's trading at a PE multiple of just 8.7. But ironically enough, the company can't buy back any stock right now because they're using all their free cash flow to pay out dividends. At the exact same time, they want to delever the balance sheet. They want to lower their leverage ratios. But again, you can't really do that if you're using all the free cash flow to pay out dividends. So again, this is another scenario where things do have the potential to turn around. If they hit a blockbuster drug, earnings per share has the potential to grow substantially along with free cash flow, which would create a sustainable dividend and likely share price appreciation over the short to midterm. But right now, there's not any evidence that's the case. And the reality is this is another capital allocation disaster. The red flags for Fizer are there. And then lastly, we have Clorox. the Clorox company stock ticker CLX which in the last year is down 25% and in the last 5 years down nearly 47%. So the company has shredded around $10 billion of market cap in just the last 5 years. For reference, it's about 11.6 billion market cap company. And if we look at the dividend metrics again, I think you'll know what you'll see. The starting yield is now sitting above 5%. We're at 5.2%. But the dividend growth has essentially been non-existent. It's at 1.79% which is certainly well below the rate of inflation. So in terms of real dollars, we haven't seen any dividend growth whatsoever. And again, what's even more concerning, you know what to look for at this point, look at the free cash flow payout ratio. By 2022, it had jumped up to 106%. We saw a spike of free cash flow in 2023 where the ratio looks strong again, but then the payout ratio is at 123 and as of last year sitting around 79%. So when we're simply looking at 2025 data, that is a sustainable free cash flow payout ratio, especially a free cash flow staying relatively stable, which by the way is not the case for Clorox. But in a world where it was, that could be a sustainable payout ratio. But again, there's a couple of concerns that I have as it relates to Clorox, particularly again when we look at their 2026 guidance. If we start to scroll down, look at this. The company now expects net sales to be down by about 6%. So net sales, in other words, we're talking about top lines, it's expected to be down by 6%. Now, this decline in revenue isn't necessarily anything new for Clorox. We can see revenue back in 2023 was almost 7.4 4 billion and then it's declined over the last couple of years relative to where it was in 2023. And with around a 6% decline in 2025, it'll be closer to around 7 billion in 2026, which for reference is the lowest we've seen since 2020. Now, ultimately, again, when we talk about dividend sustainability, the goal is to grow free cash flow since dividends are paid out of free cash flow. And it's really difficult to grow free cash flow if revenue is not growing. And it's especially hard if revenue is in decline. However, there is one caveat. If revenues are slightly declining, but you're still expanding your profitability ratios, free cash flow can continue to grow. So, what's going on with the profit margins? Well, we can see gross margin is now expected to be down 250 to 300 basis points. So, now we're talking about margins eroding while revenues are simultaneously declining. So, this company might not be in as dangerous of a position as maybe Fizer or Pepsi yet, but we can see they're very close to the free cash payout ratio in 2026, climbing substantially to a very dangerous range once again. And the market seems to realize this because look at the short interest on this one. Short interest is at 9.37%. So, there's a lot of large institutions already actively betting against this stock. And again, it's another example where just simply looking at the PE multiple, the stock looks attractive. It's trading at its lowest valuation in the last 5 years, one of its highest yields in the last 5 years. But the stock is seeing some serious capital allocation issues. They're seeing issues with their margins and they're seeing revenues now decline. This is a company where in the next few years, if something doesn't change, once again, that dividend could be at risk. So, go ahead and let me know what you think of these three stocks in the comments down below. And hopefully it helps you better understand what to look for to find out if dividends are actually sustainable.