Should Investors Buy The Gap for its 6% Dividend?

The Gap (NYSE:GPS) has lost 40% of its value over the past 12 months. Investors have been down on the stock as its profits have been very slim, sales growth has been hard to come by, and the markets have been very bearish on the retail sector.

The good news is that with the falling share price, Gap's dividend yield has gone up as a result of the decline. Paying its shareholders a quarterly dividend of $0.2425, The Gap stock is currently yielding 6% per year.

For investors, the question is whether the company can afford to keep up those dividend payments because if it can't, that might mean that a cut to the payouts may be around the corner.

Over the trailing 12 months, The Gap has generated free cash flow of $281 million. But in two of its last three quarters, the company has had negative free cash.

Unfortunately, that means that the company hasn't been generating any excess cash to be able to pay out as dividend. If that trend continues, there's a potential that the dividend could be in trouble.

As tempting of a dividend as it may be at 6%, there's simply too much uncertainty surrounding The Gap to make the stock a worthwhile investment today. Old Navy, Gap, and Banana Republic all saw their comparable sales decline in Q3.

And unless the company can find a way to turn things around, not only could its dividend be in jeopardy, but it could be the next big retail stock to find itself struggling to stay above water.