The Looming Dividend Cut Crisis: Why MAKSY and Other High-Yield Stocks Pose a Risk in 2025

In a world where low interest rates and inflation have made high-yield stocks increasingly attractive, investors are being lured by the siren call of 6%+ dividends. But beneath the surface of these tempting payouts lies a growing crisis: unsustainable payout ratios, deteriorating earnings, and ballooning debt. For companies like Marks & Spencer (MAKSY) and its peers in the high-yield universe, these red flags signal a looming dividend cut that could devastate portfolios in 2025.

The Payout Ratio Trap: When Dividends Outpace Earnings

Marks & Spencer's Q2 2025 results revealed a 0% cash dividend payout ratio, a stark contrast to its recent semiannual dividend of $0.0698 per share. While this might seem like prudence, the company's Dividend Sustainability Score of 49.55% and a low Growth Potential Score of 19.68% paint a worrying picture. MAKSY's decision to retain cash is not an anomaly but part of a broader trend among high-yield stocks.

Consider B&G Foods (BGS), which sports a 95% payout ratio. With Q1 2025 sales declining 10.5% year-over-year, BGS's ability to maintain its dividend hinges on a fragile balance of cost-cutting and debt. Similarly, Artisan Partners (APAM) has a 87.6% payout ratio, leaving little room for error in its volatile asset management business.

The problem isn't limited to retail or finance. Polaris Inc. (PII), a 7.7% yielder, saw a 64% drop in 2024 EPS as demand for recreational vehicles waned. Franklin Resources (BEN), with a 6.2% yield, faces a 37% Q1 2025 net income decline due to the rise of ETFs. These companies are relying on short-term fixes—cost reductions, asset sales, or debt—to fund dividends, not sustainable growth.

Earnings Deterioration: The Hidden Cost of High Yields

High-yield stocks often thrive in stable markets, but earnings declines can erode their foundations. Altria Group (MO), a Dividend King with an 80% payout ratio, is grappling with declining cigarette sales and a slow pivot to e-cigarettes. Its 6.8% yield masks a 15% drop in U.S. smoking rates over the past decade. Meanwhile, Enterprise Products Partners (EPD), a 7% yielder, is exposed to volatile energy prices. A 10% drop in oil prices could slash its distributable cash flow by 20%.

The risks are compounded by negative free cash flow. Two Harbors Investment (TWO), a 15.32% yielder, funds its payouts via debt—a precarious strategy in a rising interest rate environment. If refinancing costs spike, TWO could face a liquidity crunch.

Debt as a Double-Edged Sword

Rising debt levels are another silent killer. B&G Foods carries $2.06 billion in debt (8.4x EBITDA), while Two Harbors' Altman Z-Score of 1.48 signals a high bankruptcy risk. For MAKSY, declining long-term debt to £3.303 billion (down 19.86% YoY) is a positive, but its debt-to-equity ratio of 1.2 remains above the retail sector average. This leverage amplifies risks during downturns, as seen in the recent cyberattack that could cost MAKSY £300 million in operating profit.

The Investor's Dilemma: Yield vs. Total Return

The allure of high yields is undeniable, but history shows that chasing them can backfire. Since 2007, nearly 60% of dividend cuts originated from companies with payout ratios above 80%, with an average cut of 36%. A stock that drops 30% in price despite a 10% yield results in a net loss.

The solution lies in prioritizing total return over yield alone. Focus on companies with payout ratios below 60%, growing earnings, positive free cash flow, and manageable debt. For example, Verizon (VZ) offers a 5.8% yield with a 58% payout ratio and $14 billion in annual free cash flow. Contrast this with United Parcel Service (UPS), which has a 95.6% payout ratio and declining freight volumes.

Navigating the 2025 Storm

The dividend cut crisis isn't a distant threat—it's already unfolding. By 2025, a combination of interest rate hikes, economic slowdowns, and sector-specific headwinds will test the resilience of high-yield stocks. MAKSY's recent cyberattack and debt-laden peers like BGS and APAM are early warning signs.

Investors should:
1. Avoid companies with payout ratios >80%.
2. Demand earnings growth of at least 5% annually.
3. Monitor debt metrics like EBITDA and Altman Z-Scores.
4. Prioritize free cash flow over net income.

The market's next wave of volatility will likely be driven by dividend cuts, not just interest rates. By focusing on fundamentals over yields, investors can sidestep the trap and position themselves for long-term resilience.

In the end, the lesson is clear: high yields are not a reward for patience but a warning. As Warren Buffett once said, “Price is what you pay; value is what you get.” In 2025, the value of sustainable dividends—and the companies that produce them—will be tested like never before.