Are HSBC Holdings plc, BP plc and Sainsbury plc DIVIDEND DISASTERS in the making?

A deluge of research over the years has concluded that investing for income and reinvesting those dividends can be an excellent way of growing wealth long term. Today, I’ll be looking at three FTSE100 giants going through tough times and asking whether their payouts look secure.

Don’t bank on it

HSBC (LSE:HSBA) shareholders have endured an awful three years. The shares, priced as high as 754p in 2013, are now down to 447p. A loss of capital is bad enough but could the dividends go too?

Sufficient dividend cover is essential if companies are to keep their payouts. This is the ratio of a company’s net income over the dividend paid. If this number drops below one, it indicates that a company is dipping into reserves to fund its payout. This can only be sustained for a short period if earnings don’t improve.

As things stand, HSBC shares currently yield a sky-high 7.6% and are just about covered by earnings. This isn’t an encouraging sign, even if Britain does remain in the EU and the shares rise after 23 June. With Lloyds offering a yield of 6%, almost twice covered, I know which bank I’d feel more secure owning.

Running dry?

With a barrel of Brent Crude recently passing the $50 mark, it looks like the price of oil may have hit its nadir back in January. We couldn’t have known back then, of course, and nor can know for sure what will happen in the future.

It’s not just the volatility of the oil price (or the size of the CEO’s pay packet) that make me bolt from BP’s (LSE:BP) shares though. It’s the questions surrounding the company’s payout. In dark times, the dividend should be the one thing to appease frustrated investors.

BP currently yields a massive 7.5%. Here, however, the cover is a pitiful 0.45. Should the price of black gold fall or just fail to rise significantly in the near term, BP’s dividend could be reduced or scrapped. Will those investing for income really want to take that risk with so many other, more stable opportunities available?

One to discount?

Sainsbury’s (LSE:SBRY) price price war with its ‘big four’ and German rivals needs no introduction. A recent report by Kantar Worldpanel estimated that the established players continue to lose market share to the latter. On Wednesday, the market will discover how the company has fared in the last few months when it issues a trading update.

Investors will also want to learn more about the offer for Home Retail. This may turn out to be a masterstroke by CEO Mike Coupe, but I need to be convinced. In troubled times, retailers should be focusing on the basics and attracting people back to their stores. To me, Argos represents a tired brand. If shareholders fail to see the deal’s attraction (and like-for-like sales have also dipped), Sainsbury’s share price could fall quite significantly.

Sainsbury’s currently yields 4.9% for 2016. Is a cut likely? Perhaps not given that, according to Stockopedia, this payout is covered almost twice by earnings. Indeed, it’s done well to sustain such a decent dividend given the current climate. That said, I suggest that most private investors would be better off channelling their wealth elsewhere given the incredibly competitive groceries market and the uncertainty surrounding the recent takeover.

While HSBC, BP and Sainsburys may interest contrarian investors keen to buy when others are fearful, I wouldn’t be tempted to invest in any of these companies purely for the income they offer.

Most businesses experience tough times at some point, of course. As long as the dividend looks fairly secure, periods of volatility can often present income investors with a chance to increase their holdings, bag the payouts and await a recovery in the share price. As always, a detailed and dispassionate evaluation of a company is advised before any decisions are taken.

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Paul Summers has no position in any shares mentioned. The Motley Fool UK has recommended BP and HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.