7 Dangerous Dividend Stocks to Avoid at All Costs
In the aftermath of this month’s banking crisis, plenty of financial stocks appear appealing. However, far from bargains, many of these stocks are to be considered dividend stocks to avoid.
Despite recent moves to rescue distress institutions, don’t assume this banking crisis is close to resolution. More firms could be direct/indirectly affected, resulting in further price declines.
In addition, these stocks may have high trailing dividend yields, but their forward yields could end up being far different. Besides knocking them lower, a continued banking crisis may cause more names slashing or suspending their payout. In fact, one of these such stocks has already done just that.
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Having said all this, there is also a high-yielding non-financial name, which, for other reasons, is a dividend stock you should skip on as well.
“Dividend trap” risk runs high with these seven dividend stocks to avoid, each of which currently earns either a D or F rating in Portfolio Grader.
Bank of America
Ally Financial (ALLY)
In contrast to many other financial stocks listed below, Ally Financial (NYSE:ALLY) already seemed in trouble well before banks such as SVB Financial’s (NASDAQ:SIVB) Silicon Valley Bank collapsed.
Investors have been concerned about ALLY stock, because of high exposure to a possible “auto loan crisis.” For the past decade, Ally has been diversifying its business, but this financial institution remains largely an auto lender. To make matters worse, Ally not only has high general exposure to auto loans.
It is also a major lender/financing source for troubled used car retailer Carvana (NYSE:CVNA). The risks associated with D-rated ALLY stock appear to be reflected in its valuation, as it is trading for only 6.5 times earnings. With a dividend yield of 4.95%, hardly a lock, but shares have likely found support thanks to some Warren Buffett rumors.
Bank of America (BAC)
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Bank of America (NYSE:BAC) has so far avoided heavy damage from the aforementioned crisis. However, alongside other stocks in the sector, shares in this big bank have tanked because of these recent events.
Falling from the mid-$30s to the high-$20s per share, BAC stock has become cheaper than it’s been in a long time. Presently, the stock trades at 8.5 times the profits and has a 3.24% dividend yield. Despite these positives, not to mention recent arguments some have made stating that SVB’s loss is BAC’s gain, keep in mind that the banking world is not out of the woods just yet.
As I argued recently, many factors could weigh on shares from here. That’s not to say BAC’s dividend is under threat, but shares get a D rating in Portfolio because of these risks, and it’s one of the dividend stocks to avoid.
First Republic (FRC)
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First Republic (NYSE:FRC) is one bank affected by the latest troubles in the banking sector. Shares in this San Francisco-based private banking and wealth management firm have dropped by nearly 90% in the course of a month, after getting rescued by several of the big banks.
FRC is also the bank that I hinted above had to suspend its dividend. With this massive collapse in price, and the dividend suspension, it may seem as if the worst is already over for FRC stock. Unfortunately, even after its much-publicized “rescue,” First Republic remains in trouble.
With so much up in the air, it’s not worth even trying to handicap whether wagering that F-rated FRC stock survives is worth the risk. As for FRC’s dividend, which if reinstated today would give the stock a 8.74% yield? Don’t count on it returning soon.
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Much like with First Republic, it is perhaps too late to say that Intel (NASDAQ:INTC) is one of the dividend stocks to avoid. While the chip maker has not suspended paying out dividend, the company cut its payout by 66% last month, to conserve the cash necessary to fund its turnaround.
Some optimistic commentators have called this a wise move. However, while slashing the payout is preferable, don’t assume a rebound is in store. There’s a lot to suggest that Intel’s turnaround plan, which hinges on the company becoming a leading fabricator for other chip makers, will fail to fully play out.
Instead, the company’s operating performance could remain lackluster. The dividend may take a long time to climb back to the prior levels. This leaves D-rated INTC at risk of staying in a slump.
Charles Schwab (SCHW)
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While known mainly as a brokerage firm, Charles Schwab (NYSE:SCHW) has become another financial stock under scrutiny because of the current banking crisis. These concerns are valid, given Schwab’s main source of revenue, which comes from taking uninvested funds from client accounts, and investing it in fixed-income securities.
With the rise in interest rates, clients have moved this excess cash out of their Schwab accounts, all while unrealized losses have increased in the firm’s fixed income portfolio. Although it may not be at risk of experiencing a SVB-esque liquidity crunch because of this, it may end up having a severe impact on future earnings.
Add in how shares aren’t really a bargain (trading for 15 times earnings), and this D-rated stock’s forward yield isn’t exactly high (1.88%), there’s no reason at all to ‘buy the dip’ here.
U.S. Bancorp (USB)
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With the banking crisis knocking U.S. Bancorp (NYSE:USB) to a low valuation (9.4 times earnings), and giving it a forward yield of 5.5%, it makes sense why many commentators are out there calling it a golden buying opportunity at present price levels.
But far from a no-brainer opportunity among dividend stocks, it’s best to consider USB stock one of the dividend stocks to sell. Sure, U.S. Bancorp has been vocal about its confidence to weather current storms.
However, there’s no getting around the fact that USB has a high level of unrealized losses. The market was clearly onto something when it bid down USB. Until USB works through this key issue, consider it best to avoid this D-rated dividend stock.
Wells Fargo (WFC)
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Wells Fargo (NYSE:WFC) is another big bank stock hammered as of late. Similar to BAC and USB, some investors believe this pullback has pushed shares to a heavily discounted valuation. This is debatable.
WFC stock trades for 11.5 times earnings, it’s technically pricier than BAC. Shares also don’t exactly offer a super high dividend to investors (3.31%). This calls any argument that WFC has become oversold into question.
Alongside this, it’s important to note that the fallout from the fake accounts scandal from a few years back continues to weigh on Wells Fargo’s operating performance.
The bank has also ended up in the crosshairs of regulators again, due to a more recent scandal. Far from overreacting, it seems investors aren’t yet bearish enough about WFC, which earns a D rating in Portfolio Grader.
On the date of publication, Louis Navellier had a long position in BAC. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article.
The InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
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