These companies pay out more than they earn

Dividends are all the rage with investors. But some companies are so eager to hand them out, they're paying dividends that are even bigger than their profit.

There are 42 companies in the Standard & Poor's 500, including computer storage company Seagate Technology (STX), earth moving equipment maker Caterpillar (CAT) and energy pipeline company Kinder Morgan (KMI) that are digging really deep to keep investors happy with their dividends, according to a USA TODAY analysis of data from S&P Global Capital Markets. These companies have paid dividends the past 12 months that exceed their reported net income.

It's easy to see why: Dividends are hot and investors want them badly. With the stock market stuck in neutral, dividends have been one of the only sources of dependable returns so investors are paying up for them. The iShares Core High Dividend exchange-traded fund, a basket of high-yielding stocks, is up 13.1% this year, leaving the S&P 500 in the dust with its 4.2% gain. Utilities have turned into the hottest sector - gaining 21.4% this year - mostly due to outsized dividends.

It's hard to blame investors for wanting companies to write big dividend checks since returns elsewhere are so hard to come by.  So far this year, dividends paid by S&P 500 companies accounted for a third of total returns. Last year, the market's 2.1% dividend yield was the only return investors got since stocks fell 0.7%.

Companies are happy to oblige. S&P 500 companies that pay a dividend on average have paid out two-thirds of their net income over the past 12 months, according to S&P Global data. If you add in cash companies spent buying back their stock, another way to return cash to investors, companies are paying out 128% of what they earned, which is the highest amount on record excluding the financial crisis of 2008, according to a research report from Barclays' Jonathan Glionna.

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Payouts are soaring as rising dividends "and declining net income have all contributed to the increase in the total payout ratio," Glionna said in his report.

Seagate, for instance, paid 225% of its net income to investors in the form of dividends the past 12 months. The massive dividend is now generating a more than 10% yield for investors, which is roughly five times the market's yield. Seagate has triple-downed on its dividend, diverting cash that previously would have been paid to stock buybacks or extinguish debt, says Joseph Wittine, analyst at Longbow Research. The company "technically has enough cash to support the dividend, for now," he says. But if the business for storage continue doesn't improve, cost cuts could be needed.

It's a similar situation at Caterpillar. The company paid out $157 in dividends for every $100 reported in net income. Caterpillar's net income is taking a hit due to weak demand, but the company is "committed to its dividend," says Lawrence Demaria, analyst at William Blair. "The (dividend) is very important to (Caterpillar)," he says. Some investors are concerned the company's dividend, currently at a 4% yield, could be difficult to sustain. But Demaria says the "dividend is safe for this year, and the company should be able to withstand weakness in end-markets for a while before it has to reconsider this."

There are some special cases to consider. Some companies paying out high percentages of profit as dividends must do so because they are real-estate investment trusts. Some companies like REITs also have large non-cash expenses, making the payout ratio distorted, says Matthew Heinz, analyst at Stifel. Equinix, a data center company, is structured as a REIT and must pay out at least about half its income, says James Breen, analyst at William Blair. The last 12 months the company paid out 528% of net income as a dividend. That's somewhat exaggerated because the company's net income took a hit from restructuring charge last year. Merger costs also took a bite out of net income at Kraft Heinz (KHC), which explains why its dividend payout ratio of 214% looks so high, says Erin Lash, analyst at Morningstar. Going forward, the company has plenty of cash to pay the dividend, says Christopher Growe, analyst at Stifel.

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Some companies have already made adjustments to dividends to make them more affordable going forward. Kinder Morgan, which paid out dividends the past 12 months that were 2,000% greater than net income, cut its dividend by 75% in the fourth quarter of last year. Excluding many non-cash charges, the company's adjusted payout rate is now closer to 75%, says spokesman Richard Wheatley.

These companies' profits could certain grow and catch up with dividends. But investors are wise to take notice of the rush to pay out so much. High payout ratios tend to be harbingers for poor returns down the road because they mark peaks in the business cycle, Glionna says, which is bad news for stocks. " A high total payout ratio implies low future returns for the S&P 500," he says.

S&P 500 COMPANIES WITH THE HIGHEST PAYOUT RATIOS

Company, symbol, payout ratio *

Kinder Morgan, KMI, 2574.1

Spectra Energy, SE, 627.0

Chevron, CVX, 617.3745

Equinix, EQIX, 528.8

Helmerich & Payne, HP, 291.7

Iron Mountain, IRM, 282.2

Digital Realty Trust, DLR, 241.6

Seagate Technology, STX, 225.4

Ventas, VTR, 222.7

Harris, HRS, 220.4

Kraft Heinz, KHC, 214.4

Realty Income, O, 202.6

Zimmer Biomet, ZBH, 201.7

PPL, PPL, 195.5

ONEOK, OKE, 191.5

Schlumberger, SLB, 158.7

Bristol-Myers Squibb, BMY, 158.5

Caterpillar, CAT, 157.9

Johnson Controls, JCI, 155.7

Weyerhaeuser, WY, 154.7

* trailing 12 months

Source: S&P Global Market Intelligence, USA TODAY