Evaluating Risks in Dividend Investing

We have repeatedly highlighted the risks for dividend investors who simply gravitate toward companies with optically high dividend yields.

One reason high dividend yields are so tempting is that many such companies also possess seemingly attractive price-earnings ratio multiples. A 6% or higher dividend yield with a high single-digit P/E holds great appeal for a certain type of dividend investor.

Generally, we address dividend investors seeking increasing income with minimal associated drama. This results in a bias towards growing companies with strong balance sheets, ample free cash flow, modest payout ratios, and healthy but not piggish dividend yields.

A diversified portfolio of names meeting these criteria is an excellent starting point for income-oriented investors. But to mix things up, let’s look at the riskier side of dividend investing.

Without offering an opinion on the stock, appliance manufacturer Whirlpool (ticker: WHR) serves as an interesting case study. The company has paid a consistent-to-growing dividend over the past 70 years and has a current dividend yield of greater than 7%. After declining about 45% from peak to trough this year, the forward P/E is under 10x.

Whirlpool has been facing headwinds due to a softer housing market while investors also remain concerned about its debt load totaling more than $7 billion, which restricts its flexibility and has resulted in both S&P and Moody’s downgrading the company’s unsecured credit rating to junk this year. Tariffs are a secondary factor, but the company highlights its exposure is relatively limited, producing domestically 80% of what it sells in the U.S., its largest market.

Though the risk profile of high-yielding stocks is generally different from higher quality names, the basis for analysis remains the same with free cash flow, the primary point of emphasis. Free cash flow serves as the pot from which dividends get paid. For heavily indebted companies lacking significant growth, debt paydown also lays claim to free cash flow. Companies generally balance the priority of dividends and debt paydown based on the outlook for the business. If the outlook deteriorates, it is the dividend that typically gets cut.

In the case of Whirlpool, 2025 guidance reflects 3% organic sales growth driven by new product launches, margin expansion from cost reductions, and between $500-$600 million of free cash flow. At their current level, dividends consume roughly $400 million.

The company has outlined a goal to pay down about $700 million of debt this year, with approximately $500 million coming from the sale of a portion of its India business. Whirlpool hopes to get to a more manageable mid-3x net debt to EBITDA (earnings before interest, taxes, depreciation and amortization) by the end of 2025 from approximately 5x today. The schedule of future debt maturities should also be considered, as an inability to refinance the debt could put the dividend at risk. For Whirlpool, a recent issuance of debt is earmarked to partially refinance $1.85 billion in debt maturities later this year. Debt maturities for the next three years run at or less than $618 million annually.

Consensus analyst expectations reflect modest revenue growth over the next few years with free cash flow growing to about $800 million in 2028. These estimates are likely to assume some rebound in the housing market that may or may not materialize. If these expectations prove correct, the company has a path to maintaining/growing its dividend and getting net debt-to-EBITDA down to its longer-term target of 2x.

Buying a dividend stock with a profile like this can work out very well, but prudent ownership of the stock requires close monitoring of business trends. The additional yield comes at the cost of some extra time and effort, and the ride is unlikely to be smooth.

A final note of caution related to riskier dividend names. A stock with a high yield can be particularly challenging to decide to sell, even if the stock declines for valid reasons. This is because if the situation deteriorates, the yield keeps going up (until the dividend is inevitably cut or suspended) while the multiple based on trailing earnings typically keeps getting cheaper.

Often in these circumstances, management keeps suggesting a turnaround is just around the corner, reassuring investors the dividend remains “a priority.” A sober analysis of the facts is particularly important.

Selling takes the humility to admit a mistake as well as the willingness to turn your back on a juicy yield and low P/E multiple. For some, sprinkling some higher-risk dividend stocks into their portfolio can make sense, but make sure these riskier stocks are mentally labeled as such, be prepared to spend additional time monitoring the underlying fundamentals, and buckle up for what might be a bumpy ride.

This article originally appeared in the September 2025 issue of BetterInvesting magazine and is reprinted by arrangement with the organization.