A high-yielding dividend can sometimes be a ticking time bomb. When a dividend yield gets up over 10%, investors should be taking a close look at the safety of the payouts and whether the company can continue making them. Usually, when a yield gets that high, it's not because the company has intended to provide such a high yield but because the stock has been struggling to the point that the yield has become so high.
Algonquin Power & Utilities Corp (TSX:AQN)(NYSE:AQN) fell into that category with its yield recently being up over 10%. The stock has fallen close to 50% over the past year as some disastrous financials have made investors bearish on the stock. And this month, the company announced what to many may have seemed like the inevitable: that Algonquin would be cutting its dividend.
On Jan. 12, the company said it would be reducing its dividend and reducing capital expenditures to help, "position the company for sustainable, long-term growth." The company's quarterly dividend for April will be just $0.1085, versus the $0.1808 it was paying up until now. Even with the reduction, however, Algonquin's stock will still be yielding 6.1%, which is far higher than the S&P 500 average yield of 1.8%.
Investors can still collect a high yield from the stock but for investors who have bought earlier, it's a bittersweet position to be in because while Algonquin is doing what it thinks it needs to in order to strengthen its financials, it means much less dividend income in the future.
