Should You Buy Wendy's Stock for Its 7.1%-Yielding Dividend?

Wendy's (NASDAQ: WEN) stock has been rallying of late, prompting some to wonder if another meme-fueled rally could be underway. The fast-food giant hasn't been taken seriously in recent years as a top investment option; in five years, its valuation has crashed by a whopping 65%.

Amid its decline this year, its dividend yield has shot up to a mouthwatering 7.1%, which is well above the S&P 500 average of only 1.1%. If the payout is safe, that could provide investors with some incentive to buy and hold. But is the dividend really sustainable, and if it is, should you buy Wendy's stock?

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What do the company's recent financials say?

Wendy's has a payout ratio of around 73%, but it's always a good idea to look at the most recent results to get a good indication of its financial strength. Earnings, after all, can get distorted due to one-time gains or losses. Taking a closer look can be imperative to see what's really going on with the business.

During the first three months of the year, the restaurant company's revenue rose by a modest 3% to $540.6 million. While the growth was a good sign, what was problematic was the company's worsening bottom line, with net income of $22.7 million declining by a staggering 42%, as costs rose at a faster pace than revenue.

The key number to focus on is the per-share profit, which totaled $0.12. That's slightly below the $0.14 that the company pays in dividends per share. Last year, the company slashed its dividend, previously paying $0.25 per quarter. If its financials don't improve significantly, there could be another cut around the corner.

Why I don't expect the dividend to remain this high

Wendy's may offer a high yield, but I wouldn't rely on it remaining intact. Not only are its earnings per share less than what the company is paying in dividends right now, but it's also in the midst of a turnaround. The company may need to use cash flow to strengthen its business and fund expansion efforts, including opening up to 1,000 restaurants in China. Maintaining this high of a payout, or any payout at all for that matter, may not be sustainable over the long haul.

Although the yield may be tempting, minimizing risk is key for dividend investors because if that dividend income disappears, there may not be much of a reason for holding onto the stock anymore, and it could fall sharply. With falling profits and an ambitious long-term strategy ahead, staying on the sidelines and taking a wait-and-see approach with Wendy's stock may be the best move right now.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.