The last few weeks have been challenging for UK dividend investors as a number of high-profile FTSE 100 companies have cut their dividends. First, there was Vodafone, which slashed its payout by 40% in order to deal with its debt pile. Then, Royal Mail also cut its dividend by 40% so that it could free up cash for investment.
Yet neither of these cuts were really surprising, in my view. There were many red flags with Vodafones dividend. And in an article on Royal Mail last year, I said: The profit warning makes me concerned that Royal Mails dividend may not be sustainable.
The bottom line is that when investing for dividends, its important to consider a range of factors including dividend coverage, debt, and earnings growth.
Today, Ill be taking a closer look at two other popular high-yield FTSE 100 stocks, Lloyds Bank (LSE: LLOY) and BT Group (LSE: BT.A). Could these companies cut their dividends too?
Lloyds Bank
For me, Lloyds dividend looks sustainable. The stocks prospective dividend yield is quite high at 5.9% (high yields can be a signal that the market believes a dividend cut is coming) yet not high enough to get me worried about a cut.
One key difference between Lloyds and Vodafone/Royal Mail is that the stock has a much higher dividend coverage ratio. Currently, analysts expect a payout of 3.4p per share from Lloyds for FY2019, while earnings are expected to be 7.8p per share. That equates to a dividend coverage ratio of a healthy 2.3. By contrast, Vodafone had a dividend coverage ratio of 0.99 last year. A ratio under one is unsustainable, while a ratio under 1.5 is a little risky.
Additionally, Lloyds has increased its dividend payout considerably in recent years (three-year dividend growth of 43%). Thats another positive sign. When a company hikes its dividend by that kind of magnitude, its a signal management is confident about the future. And analysts expect further dividend growth this year and next, which is also reassuring. Finally, Lloyds appears to have momentum at present. Last year, earnings per share jumped 27%. So overall, I see Lloyds dividend as safe for now.
BT
BTs dividend, on the other hand, concerns me. I have said for a while now I think theres a real possibility of a cut here. The forward-looking yield of 7.7% is dangerously high, in my view.
While BTs dividend coverage ratio looks reasonable at 1.6, the lack of dividend growth here is a red flag for me. Quite often youll see companies hold their dividend steady for a number of years before finally cutting their payout. For the last three years, BT has paid the same dividend payout of 15.4p per share.
Furthermore, the company has a huge debt pile and pension deficit that it needs to sort out. Thats another classic red flag. Ultimately, it was Vodafones escalating debt pile that led to its dividend cut.
Finally, BT is struggling at the moment. For example, full-year results last month showed a 1% fall in revenue and a 6% decline in adjusted earnings per share. Thats not ideal from a dividend investing perspective. Weighing up all these factors, I think theres a strong chance we will see a dividend cut from BT in the near future.
If youre looking to supplement your salary or pension with regular dividends, then this special free investing report could be a great place to start! A Top Income Share From TheMotleyFoolUK profiles a company that youre bound to have heard of but what you may have overlooked is the current near-6% yield on offer that our MotleyFool analyst believes is comfortably covered by profits and by the firms cash flow. Click here to claim your free copy now!