This Tech Stocks 4%-Plus Yield is at High Risk of Being Cut

NetApp (Nasdaq: NTAP) is a cloud storage and data management company based in Silicon Valley. But unlike most tech companies, this one has a robust 4.5% dividend yield.

Can tech investors expect to continue to receive their $0.48 per share quarterly dividend?

A big red flag is that NetApp’s free cash flow is headed in the wrong direction. In 2019, it declined slightly to $1.17 billion from $1.33 billion the year before.

This year, free cash flow is projected to drop to $936 million, and then it’s expected to drop all the way down to $714 million in 2021.

This year, NetApp is forecast to pay $439 million in dividends, or 60% of its free cash flow.

In normal, nonpandemic times, that would be perfectly okay.

But during the pandemic, I’ve taken my threshold for an acceptable payout ratio down to 50%. (A company’s payout ratio is the percentage of free cash flow that it pays in dividends.)

The reason I lowered the threshold from 75% to 50% is because the pandemic has created havoc for many businesses.

Across the board, management teams understandably feel the need to conserve cash.

I want to make sure we are not caught by surprise, assuming a dividend is safe only to see it cut later.

A company that pays out 50% or less of its cash in dividends has a big enough buffer that it can afford to keep paying the dividend even if free cash flow dips.

NetApp has a solid but brief dividend-paying history. Since it began paying a dividend in 2013, it has raised the payout every year except 2020.

But that dividend track record isn’t enough for SafetyNet Pro. The falling free cash flow is a major problem, and the higher-than-acceptable payout ratio is also an issue.

NetApp’s dividend is attractive, especially for a tech company, but I don’t think you can consider it safe. The dividend cut may not come immediately, but if 2021’s numbers are weaker than expected, a reduction next year is very possible.

Dividend Safety Rating: D

grade
Good investing,

— Marc

Perfect Stock Caught Trading Under Secret Name... [sponsor]
It trades under a secret name... for just under $5. But thanks to a developing situation that could create nearly 50,000 American jobs and $10 billion in facilities... this may soon be the most talked about stock in America. Find out more about the "secret stock" here. Find out more about the "secret stock" here.

Source: Wealthy Retirement