Investors surprised by a 66% dividend cut announced by Intel in late February should check out recent research – Could Investors Have Anticipated Intel’s Dividend Cut? - by Morningstar Indexes Strategist Dan Lefkovitz.
Reaching for income and neglecting risk can lead investors into yield traps, a significant risk as solvency fears grow and financial distress ripples through markets. Even blue-chip companies are not immune to dividend cuts, as demonstrated by Shell in 2020, GE in 2018 and ConocoPhillips in 2016.
“Intel demonstrates a key risk for equity income investors,” says Lefkovitz. “Healthy payouts are often found in unhealthy sectors, industries, and securities. It’s imperative to screen for dividend durability if you want to sidestep yield traps.”
Lefkovitz goes on to describe two screens used by Morningstar Indexes to avoid yield traps—the Morningstar Economic Moat Rating and Distance to Default measure of financial health. Both are shown to have predictive power across time periods and geographies in identifying companies capable of sustaining their dividends.
Companies with Better Distance to Default Scores Were Likeliest to Sustain Dividends Over Time
Source: Morningstar Indexes. Time Period Studied: 2005-2022.
©2023 Morningstar. All Rights Reserved. The information, data, analyses and opinions contained herein (1) include the proprietary information of Morningstar, (2) may not be copied or redistributed, (3) do not constitute investment advice offered by Morningstar, (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete or accurate. Morningstar has not given its consent to be deemed an "expert" under the federal Securities Act of 1933. Except as otherwise required by law, Morningstar is not responsible for any trading decisions, damages or other losses resulting from, or related to, this information, data, analyses or opinions or their use. References to specific securities or other investment options should not be considered an offer (as defined by the Securities and Exchange Act) to purchase or sell that specific investment. Past performance does not guarantee future results. Before making any investment decision, consider if the investment is suitable for you by referencing your own financial position, investment objectives, and risk profile. Always consult with your financial advisor before investing.
Indexes are unmanaged and not available for direct investment.
Morningstar indexes are created and maintained by Morningstar, Inc. Morningstar® is a registered trademark of Morningstar, Inc.