If you are attracted to dividend stocks for their passive income, be careful because some dividend stocks require more attention than you think.
Passive income suggests that income requires little or no work. However, certain dividend stocks require a lot working. In fact, some may Cut their dividends. As a result, these dividend stocks require active management by the investor. And it's better to think of them as total return investments than as dividend investments.
If you are dealing with substandard, cyclical or commodity stocks, be extremely careful!
Discover the history of dividends from Teck Resources Stock. The cyclical nature of its mining activity makes its profitability very unpredictable.
TECK.B Dividend data by YCharts. History of the dividends of TECK.B.
In addition to mining inventories, oil and gas producers also tend to generate volatile profitability. So it's very interesting that Vermilion energy (TSX: VET) (NYSE: VET) has retained its dividend to date. Its yield of + 14% requires a reduction of the dividend! At least, the market is expecting one.
VET Dividend Yield (TTM) data by YCharts. Dividend and history of Vermilion.
On the one hand, management is under pressure to maintain the dividend because Vermilion maintains or increases the monthly payment since 2003. On the other hand, it may be better for the company to reduce the dividend and Use capital to improve its balance sheet. .
The company seems to favor the protection of its dividend growth, which can be a good thing, because the prices of raw materials are low. This year, it has reduced capital investment from $ 10 million to $ 520 million, but still expects a 5% increase in output per share.
Next year, the investment will be reduced to $ 450 million, but it is planned to maintain production at about 100,000 barrels of oil equivalent. In doing so, it anticipates sequential growth in free cash flow in 2019 and 2020.
That said, Vermilion 's total distribution ratio since the beginning of the year is 105%. So, do not bet that the farm will keep its dividend. Again, since 2003, Vermilion had 12 years in which the payout ratio was above 100%, while maintaining the dividend. Thus, whether or not Vermilion ends up reducing its dividend depends on management and the macroeconomic environment.
Take away food
Do not buy dividend stocks like Teck Resources or Vermilion Energy for their potential dividend income. Because their profits and cash flow are very unpredictable, they are more likely to reduce their dividends.
You'd better look at them as total return candidates. And if you choose to invest, do not bet the farm! If you want passive income, there are much better ideas.
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A silly contributor, Kay Ng, owns shares in VERMILION ENERGY INC.
. (tagsToTranslate) stocks of dividends (t) stocks of energy (t) investments (t) stocks of metals and mines