Dividend income will tumble this year and these stocks could cut payouts next, says Morgan Stanley

Published Wed, May 6 20206:40 AM EDT

(This story is for CNBC Pro subscribers only.) Dividend payments are a great source of yield in a low interest rate and volatile market environment. But investors have to be careful because some of these yields are too good to be true as a deep recession is likely. Here are the companies whose dividend payments are the most at risk, according to Morgan Stanley. The fast-spreading coronavirus has caused unprecedented financial and societal disruption in the U.S. Morgan Stanley said the drop in economic activity will hurt corporate cash flows, potentially creating liquidity issues and pressuring capital return plans. S & P 500 dividend futures are currently pricing in about a 15% decline year-over-year, which implies about a 20% reduction through the remainder of 2020, the firm told clients. Companies like General Motors , Boeing , Estee Lauder and Occidental Petroleum have already suspended or omitted their dividends this year due to the economic fallout from the coronavirus. "To the extent more S & P 500 firms do reduce or eliminate their dividend, we see negative alpha ahead for those stocks," chief U.S. equity strategist at Morgan Stanley Mike Wilson told clients. Morgan Stanley screened for S & P 500 companies with a dividend at risk, to help clients avoid buying stocks that will ultimately drop the payment. All of the stocks have a market value above $2 billion. The firm's method is to look for companies that are conserving cash due to a drop in ongoing cash flows. The firm's screen has had about a 33% hit rate, picking up about 70% of S & P 500 stocks with dividend cuts or reductions. Take a look at Morgan Stanley's list here. Energy companies are the most well-represented on Morgan Stanley's list of risky dividend stocks. Oil and energy stocks are well known for their hefty dividends. Halliburton and Marathon Petroleum both pay a dividend yield above 7%. At the same time, the plummet in oil prices due to the coronavirus crisis have seen energy stocks crater. Certain energy behemoths are resorting to cuts in capital spending and raising additional funds, just to keep their dividend promises but Morgan Stanley is worried about Phillips 66 , Pioneer Natural Resources , Valero Natural Resources , Marathon Oil , Halliburton and Marathon Petroleum . Credit reporting company Equifax , which pays a 1.1% dividend yield, and TurboTax parent Intuit , which pays a 0.8% dividend yield, are also at risk of lowering or getting rid of their dividend payments, according to the firm. Morgan Stanley expects industrial giants Caterpillar and Deere & Co. to drop their dividend payments. Last week, Caterpillar said sales declined 21% due to the coronavirus pandemic. Caterpillar and Deere pay dividends of 3.8% and 2.3%, respectively. Consumer staple stock Sysco , which pays a 3.3% dividend yield, and cosmetic company Coty , which pays a generous 9.4% yield, are also on Morgan Stanley's list of dividends at risk. To be sure, balance sheet capacity does not guarantee a company's willingness to use it for dividend payouts. "Some of the companies that have cut dividends to date arguably had sufficient capacity to cover the dividend into the foreseeable future," Wilson told clients. — with reporting from CNBC's Michael Bloom.

An employee assembles an excavator at the Caterpillar Inc. manufacturing facility in Victoria, Texas.

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(This story is for CNBC Pro subscribers only.)

Dividend payments are a great source of yield in a low interest rate and volatile market environment.

But investors have to be careful because some of these yields are too good to be true as a deep recession is likely. Here are the companies whose dividend payments are the most at risk, according to Morgan Stanley.