With the Federal Reserve cutting interest rates in 2024, dividend stocks are back in the spotlight for investors looking for steady income. But not all high-yield stocks are safe bets — some dividends might be on the chopping block. 

A worrying trend is emerging, highlighted by Prospect Capital's (PSEC) recent 25% dividend cut, its first since 2017. The current market is tough for companies paying dividends, especially those with high payout ratios or big debts.

Analysts at Wolfe Research have flagged some stocks that could be at risk by looking at factors like dividend yields over 3.5%, net-debt-to-EBITDA ratios above 3.5x, or payout ratios over 80%. Sinclair Broadcast Group (SBGI), WK Kellogg (KLG), and Wendy's Company (WEN) are raising red flags, based on these criteria. 

Sinclair offers a 5.7% yield but has hefty debt, Wendy's has a high payout ratio of almost 100% with a 5.61% yield, and Kellogg’s financial reports highlight the company’s recent struggles to maintain profitability. As investors turn to dividends during this time of financial change, it's crucial to carefully consider these potentially shaky dividend stocks. Let's dive deeper to understand the risks and make smarter choices about these high-yield investments.

Sinclair Broadcast Group (SBGI) 

Sinclair Broadcast Group, Inc. is a diversified media company that operates a wide array of television stations and provides content across multiple platforms, focusing on local news, sports, and entertainment. 

The company has had a good year, with shares up by 35%. This might catch the eye of investors interested in dividends, but there are concerns about possible cuts. The stock hit a low of $11.13 in June 2024 and has jumped 58% since then, now sitting at $17.59 with a market cap of about $1.17 billion. 

Despite these gains, some numbers are worrying: A forward P/E ratio of 4.3x (compared to the sector's average of 13.6x) suggests undervaluation, but a high payout ratio of 577% is a red flag for dividend sustainability. A dividend yield of 5.7% is much higher than the sector average of 2.62%, raising even more questions as to sustainability considering its payout ratio. 

On the earnings front, Sinclair had a solid third quarter with core advertising revenues up by 1% and political revenues hitting $138 million — a 31% boost. However, the company lost $26 million due to shifts in commitments and, despite EPS growth to $1.43 from a previous loss, a lack of free cash flow raises questions about keeping up with dividends. Sinclair is expecting a full-year adjusted EBITDA increase of 54% to 56%, showing strong performance despite some hurdles.

Strategically, Sinclair launched the first free Broadcast-Enabled Streaming TV channel in Omaha, boosting its digital presence with NEXTGEN TV technology. It has also expanded in podcasting with "Unfiltered Soccer" featuring Landon Donovan and Tim Howard, aiming to diversify content and engage audiences more broadly.

However, Wall Street isn't completely sold on these moves. Among six analysts, the consensus is to hold: Two suggest a “Strong Buy,” three say “Hold,” and one advises a “Strong Sell.” The average target price is $19.42, suggesting about 10% upside from the current price. 

Kellogg Company (KLG)

Kellogg (KLG) is a big name in the global snack and cereal world, famous for brands like Pringles, Cheez-It, and Kellogg's Rice Krispies Treats. It focuses on delivering top-notch snacks and breakfast foods around the globe. 

Shares are up 82% over the past 12 months, and in the year to date, they are up 57%. 

With a market cap of about $1.82 billion, KLG's forward P/E ratio of 13.46x is lower than the sector average of 17.51x, which might mean it's undervalued compared to others. Its forward dividend yield is 3%, with a payout ratio of 42.91%, suggesting a more stable dividend policy than some high-yield stocks.

However, Kellogg's recent financial report shows potential issues that could affect its dividend. Net sales were down slightly by 0.4% year-over-year, but adjusted net sales went up by 0.7%. Adjusted EBITDA saw a big increase of 27.5%, leading the company to boost its 2024 EBITDA growth expectations to 5%-6%. Despite these positives, reported net income dropped by 126.2%.

On the strategic front, Kellogg is pouring money into modernizing its supply chain with plans to spend up to $500 million on upgrades and restructuring. This move aims to boost efficiency and streamline manufacturing, which could help cut costs and improve operations in the long run.

Despite these efforts, analysts are cautious about KLG, with five rating it as “Hold,” one as “Moderate Sell,” and two as “Strong Sell.” 

The average target price is $19.50, below the Dec. 5 closing price of $20.72, suggesting that the stock might be overvalued right now. 

Wendy's Company (WEN)

Wendy's (WEN) is a well-known fast-food chain famous for its fresh, made-to-order burgers and other tasty menu items. 

In 2024, Wendy's stock performance has raised some concerns about potential dividend cuts, with shares dropping 8.6% over the past 12 months. It hit a low of $15.61 in July and a high of $20.65 in May, showing a swing of 15.34%. Year-to-date, the stock is down 9.2%, facing selling pressure despite some short-lived rallies. 

With a market cap of about $3.6 billion, Wendy's forward P/E ratio of 18.02x is slightly above the sector average of 18x, which might mean it's overvalued. Its dividend yield is 5.66%, but with a high payout ratio of 95%, there are worries about whether it can sustain payments. 

Wendy's latest earnings report was a mixed bag. Revenue went up by 2.9% to $566.7 million, but net income dropped by 14% to $50.2 million due to higher costs cutting into profits. This shows the company is having trouble turning revenue growth into actual profit, raising more questions about its ability to maintain high dividend payouts. Wendy's still expects global sales to grow around 3% and adjusted EPS to be between $0.99 and $1.01 for 2024, which shows some cautious optimism.

On the strategic side, Wendy's is planning to expand in Europe with new deals in Ireland and Romania starting in 2025. CEO Kirk Tanner is also focusing on strengthening customer relationships through digital platforms and loyalty programs to boost breakfast and late-night sales.

Analysts are mostly cautious about Wendy's, with a consensus “Hold” rating from 27 analysts. Five rate it as a "Strong Buy," one as “Moderate Buy,” 19 as “Hold,” one as “Moderate Sell,” and one as “Strong Sell.” The average price target implies roughly 16% upside from current prices. 

Conclusion

In conclusion, while the allure of high dividend yields can be tempting, investors need to tread carefully with stocks like Sinclair Broadcast Group, Kellogg Company, and Wendy's. Each faces significant challenges that could impact their ability to maintain current dividend levels. When it comes to dividends, not all that glitters is gold.