Q: Is it a problem if a stock's dividend is greater than earnings?
A: When a dividend seems too good to be true, it probably is.
Investors are wise to compare the amount of cash being paid out by a company and compare that to the company's earnings. Dividends are paid out of the company's cash horde. That cash horde increases during the normal course of business if the company generates profit that exceeds the dividends it's paying out, not to mention other cash it is't using to pay for things such as stock buybacks.
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Companies can temporarily afford to pay out dividends that are larger than profits, but that doesn't last long without resorting to unusual action. Eventually the dividend will need to be cut or suspended if it tops a company's profit. How long that will take, though, depends on how much cash the company has and how much larger the dividend is than the profit. Some companies may also look to sell stock or borrow money to keep up a dividend it cannot afford from profit.
Generally, most companies can afford to pay larger dividends. The payout rate of companies in the Standard & Poor's 500 is 33%, meaning companies are paying out a third of their profit as dividends. That's low by historic standards, well below the 52% average over time, says Howard Silverblatt of S&P Dow Jones Indices.
In your e-mail, you asked about the dividend at Williams Partners (WPZ). The company pays a 6.6% dividend yield. It paid 86 cents a share in the form a dividend in the August quarter, which was greater than the 62 cents a share it earned during the second quarter. But that's likely a temporary situation: the company earned $3.60 last year, which exceeded the $3.14 a share it paid in dividends in 2012.
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