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3 FTSE 100 dividend stocks I wouldn’t touch in 2020

The FTSE 100 is offering some very attractive dividends, but a high yield on its own is not always a sign of a buy. If earnings fall short, dividends can have to be cut, and some of our top dividends are only weakly covered. Here are three that I think could come under pressure in 2020.

Steel

Steel producer Evraz (LSE: EVR) is on a forecast dividend yield of 13%. The payment would be covered about 1.2 times by forecast earnings, which might in itself be manageable if there were earnings rises on the cards to provide better cover in future years, but EPS forecasts are falling at Evraz.

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The shares are on a forward P/E of 6.5, which suggests either that investors haven’t spotted the big dividend yield, or that they don’t want it. It’s clearly the latter, and it looks to me like the company is priced perhaps even for a risk of going bust.

The biggest problem is the debt the firm carries, standing at $4,526m at 30 June, and the outlook for the company based on falling steel demand doesn’t suggest that the figure will get better any time soon. The chairman and other top shareholders of the Russian company having dumped shares also doesn’t inspire confidence.

I think the dividend needs to be suspended and that Evraz is way too risky for me.

Insurance

The Standard Life Aberdeen (LSE: SLA) share price has been picking up since August, but it’s still down 30% over the past two years, and forecast dividends stand on a yield of 6.5% for this year and next. The trouble is, predicted earnings don’t come close to covering that, accounting for just 85% of the mooted 2019 payment and 88% of 2020’s.

Part of the problem has been the difficulties and costs of managing the merger of the old Standard Life with Aberdeen Asset Management to create the new entity, though it’s looking as if 2019 could prove to be a turning point.

But assets under management have slumped, and although that’s only a relatively small part of the combined business these days, I think it’s a cause for concern.

I suspect Standard Life Aberdeen will stick it out in the hope that earnings will soon rise to cover the dividend. But with an EPS increase of only 4% on the cards for 2020, I think a dividend cut would be a good move.

Phones

My third choice is a company that has already cut its dividend, in the year ended March 2019. I’m talking of Vodafone (LSE: VOD), which was clearly paying a dividend it really couldn’t afford for years, but stubbornly held on until sense finally dawned.

The trouble is, the dividend forecast for March 2020 still isn’t covered by predicted earnings, which would reach only 82% of the required amount. And though forecast earnings rises would bring EPS up to 1.08 times the dividend in 2021, that’s still very thin, even if in fact covered.

I reckon Vodafone needed to reduce its dividend payments further, and I think there’s a chance that could happen some time in the next 12 months. Perhaps not a big chance, given its severe dislike of such an action, but I reckon it could put the company in a more attractive investment position for the long term.

I wouldn’t buy until I see decent dividend cover.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.