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7 Dangerous Dividend Stocks to Stay Far Away From

Vince Martin

Even in a broad market near all-time highs, it hasn’t been a great time to be an income investor. Dividend stocks largely have underperformed. The winners this decade generally have been tech and/or growth stocks, most of which don’t pay dividends. Adding insult to injury, of late there have been several high-profile dividend cuts in widely owned names.

General Electric (NYSE:GE) in fact cut its dividend in both 2017 and 2018. It now pays just a penny per share each quarter. Owens & Minor (NYSE:OMI), a seemingly safe healthcare distributor that like GE was slow to adapt to changes in its industry, similarly executed a double cut, to just $0.0025 (a penny per year). Anheuser-Busch InBev (NYSE:BUD) halved its payout last year to attack its debt load. Frontier Communications (NASDAQ:FTR) and Mattel (NASDAQ:MAT) eliminated their dividends for similar reasons.

All stocks wound up being yield traps — dividend stocks that investors bought for yield, only to wind up losing both income and principal as the stocks fell. They are reminders that buying a stock just for its dividend is a risky, and even dangerous, strategy. An investor owning a stock needs to focus on the company — not a single metric.

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These 7 dividend stocks may not join the list of companies who cut their dividends soon — or ever. But they are among the riskier stocks for income investors at the moment. An attractive dividend isn’t so attractive when principal shrinks, offsetting those payouts. And all 7 of these dividend stocks seem to be at serious risk of at least seeing share price declines that will offset the high yields they offer at the moment.


AT&T (T)

AT&T stock T stock

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AT&T (NYSE:T) appears to be an income investor’s dream. T stock has been a “widows and orphans” stock since the days when it was still ‘Ma Bell’. Even after the breakup, the move into cellular service, and the acquisition of Time Warner, AT&T stock still looks like a great dividend stock.

It yields 6.67%, and in December announced its 35th consecutive annual increase, making T stock a so-called Dividend Aristocrat. That dividend still represents only about 57% of projected 2019 EPS, a reasonable payout ratio that leaves some room for AT&T to pay down its massive debt load.

But I’ve long been skeptical toward AT&T stock — and I continue to be so. The attractive dividend continues to be offset by a tumbling T stock price. Over the last five years, including dividends, AT&T stock has returned a little over 12% — total. It’s not just underperformed the market, it’s barely outperformed Treasury bills at a time of historically low interest rates. Over the past year, T investors have made barely 1%; over the last three years, they’ve lost money including dividends while the S&P 500 has returned nearly 50% on the same basis.

Simply put, T has been a disappointing investment. Looking forward, it’s not clear how that is supposed to change. The cellular business is brutally competitive and at this point low-growth. The wireline business is declining. So is DIRECTV, and streaming service DIRECTV NOW is losing customers.

Outside of HBO, Time Warner — now WarnerMedia — faces a real threat from cord-cutting. And AT&T’ new streaming service seems unlikely to outcompete Disney (NYSE:DIS) and Netflix (NASDAQ:NFLX), let alone Comcast (NASDAQ:CMCSA).

AT&T may keep its dividend rising. But that’s been of little help to shareholders for most of this decade, and I’m skeptical that will change in the next one.


Macerich (MAC)

malls

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Shopping mall REIT Macerich (NYSE:MAC) has offered an attractive yield for years now — yet MAC stock keeps heading in the wrong direction. MAC trades near its lowest levels in almost eight years — a decline that has driven the stock’s dividend yield above 7%.

At these levels, the dividend stock does look potentially attractive. MAC trades at a little over 11x the midpoint of 2019 guidance for FFO (funds from operations, a common adjusted net income figure used by REITs). The dividend yield is healthy. Support for the stock around $40 seems to have held since December. And the company’s higher-end properties — what it calls “fortress malls” — in theory should better manage the changes in U.S. shopping patterns and the steady growth of e-commerce.

The problem is that the same case could have been made for the past few years. Yet MAC’s yield continued to creep up, touching 5% in 2017, 6% last year, and 7% this year. It’s not higher payouts driving those increases (though Macerich has managed to increase its payout modestly in recent years). Rather, the declining MAC share price has driven those yields higher.

The same phenomenon has played out elsewhere in the mall space, notably with lower-quality rivals Washington Prime (NYSE:WPG) and CBL & Associates (NYSE:CBL). Macerich still has a reasonably large debt load, and with the dividend payout about 80% of FFO, it may freeze increases or cut the payout to attack those borrowings. And any economic weakness can hit occupancy and cause real problems going forward.

Macerich might look like it’s at a bottom, but investors have believed that before, and been wrong in doing so.


Occidental Petroleum (OXY)

Source: Hayden Irwin via Flickr

Occidental Petroleum (NYSE:OXY) is making a big bet on U.S. shale, with some help from Warren Buffett and Berkshire Hathaway (NYSE:BRK.A,NYSE:BRK.B). Backed by the issuance of $10 billion in preferred stock to Berkshire, Occidental seems likely to win its bidding war with Chevron (NYSE:CVX) for shale driller Anadarko Petroleum (NYSE:APC).

Whether that’s good news for OXY stock remains to be seen. So far, investors seem displeased. OXY has sold off in recent sessions, and trades not far from multi-year lows. But, again, OXY is making a big bet, paying an estimated $38 billion for Anadarko against its current market capitalization of $44 billion. It is a high-risk play — but one that also will offer high rewards if rising optimism toward U.S. shale proves correct.

But for dividend stock investors, the deal raises a clear risk toward Occidental’s payout. Analysts at Mizuho pointed out that dividend coverage may not be sufficient, particularly as the acquisition is integrated. Meanwhile, the Berkshire deal alone adds some $800 million in annual preferred stock distributions.

And so it wouldn’t be a surprise if Oxy cut or eliminated its dividend. Much like Anheuser-Busch after its takeover of SABMiller, Occidental will have significantly higher interest and distribution payments — and may choose to redirect cash flow toward deleveraging. That might be the right play long-term – but it raises a significant near- to mid-term risk to the Occidental dividend, and thus to OXY stock. Weaker oil prices would only add to the pressure.

Again, this isn’t to say OXY stock is a short. But income investors looking for energy exposure have a better and hedged option in larger Exxon Mobil (NYSE:XOM). At this point, OXY is much more of a speculative play — and not a stock to be owned just because it’s a dividend stock.


PetMed Express (PETS)

pets stock

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I’ve long thought online pet retailer PetMed Express (NASDAQ:PETS) was attractive at the right price. But after recent results, the risks are clear, even with PETS offering a 5.5% yield.

Chewy.com, now owned by Petsmart, is entering the online pet prescription space in a big way. And it’s clearly taking share from PetMed Express. Revenue was flat year-over-year in fiscal Q3 (the December quarter), a notable deceleration from recent performance. In Q4, sales dropped 4% – despite sharply higher advertising spend. Lower sales and higher spending drove EPS down 35% in the quarter – and sets up a difficult fiscal 2020 for the company.

PETS may be able to maintain its dividend: the company still has nearly $5 per share in cash on the balance sheet, and no debt. But with sales and margin pressure almost certain to continue into 2020, even a 5%+ payout isn’t enough to take the risk that PETS shares will keep falling.


Coca-Cola (KO)

Coca-Cola Stock Primed For a Quiet Comeback As Soda Gets Its Fizz Back

Source: Leo Hidalgo via Flickr (Modified)

To be sure, Coca-Cola (NYSE:KO) might be in the best spot of any stock our list of dividend stocks — at least on a relative basis. It doesn’t have the debt problems of AT&T. Rival Pepsi (NASDAQ:PEP) is unlikely to take huge amount of market share, even if smaller sparkling water companies and other alternative beverage producers might. Even Coca-Cola’s history is better: the stock is a Dividend King, a designation for companies who have raised their dividends for at least 50 consecutive years.

But dividend aside, KO stock seems a risky play here. It trades at over 21x next year’s consensus EPS — despite the fact that earnings haven’t grown for years. Soda consumption is plunging. The $5 billion acquisition of a coffee chain doesn’t diversify the $200 billion-plus company enough away from that issue. KO simply looks overvalued, as I argued in March.

More broadly, as I noted last year, there’s also the fact that a number of stocks similar to KO have taken big hits of late. Branded consumer products stocks like Coca-Cola historically have been attractive, and safe, long-term income plays. (Berkshire Hathaway, of course, has made billions off its stake in the company.)

But those ‘safe’ stocks don’t look all that safe anymore. BUD shares tumbled last year, and still haven’t recovered their gains. Altria (NYSE:MO) lost a third of its value in less than three months. Kraft Heinz (NASDAQ:KHC) is a mess and trades at post-merger lows. Campbell Soup (NYSE:CPB) doesn’t look much better.

Tastes are changing. Healthy offerings and independent brands are hot right now — and that may not change. If it doesn’t, KO’s earnings are going to stay stagnant at best — and at some point, investors are going to stop pricing growth into Coca-Cola shares.


Western Digital (WDC)

WDC Stock May Be a Steal

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Investors spent the second half of 2018 worrying that earnings at chip stocks and memory plays like Western Digital (NASDAQ:WDC) were going to plunge. They’ve spent the first months of 2019 shrugging now that the earnings declines finally have arrived. WDC’s Q3 earnings missed badly, with adjusted EPS of $0.17 missing consensus estimates of $0.46 and declining a stunning 95% year-over-year.

The drop in earnings isn’t necessarily fatal to the bull case for WDC stock. Memory is a cyclical business due to volatile pricing, and it certainly seems like pricing is closer to a bottom than a top. But I wrote in March, with WDC at similar levels, that investors were underestimating the risks here — and the Q3 report strengthens that argument.

Meanwhile, Western Digital’s dividend may be at risk. EPS estimates for FY20 are now under $4 – suggesting a payout ratio climbing above 50%. The company still has over $10 billion in debt that needs to be managed. If expectations for next year keep coming down, Western Digital could choose to cut or eliminate its payout to focus on deleveraging. Analysts at Evercore (NYSE:EVR) made exactly that argument in a note in January — and it sent Western Digital stock tumbling.

A dividend cut combined with lowered earnings expectations would be something close to a disaster for WDC stock. Given that the dividend stock has bounced over 40% from December lows, it might be time for investors to take profits. Income investors, in particular, may want to look past a yield that now clears 4%.


New Media (NEWM)

New Media Investment Group Inc (NEWM)

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New Media Investment Group (NYSE:NEWM) seems like an intriguing high-yield play. New Media buys local and mid-sized newspapers, presumably on the cheap, and then uses its scale to cut costs and wring out profits. A decent amount of those profits go back to investors, or so it seems: NEWM yields nearly 15% at the moment.

But there are several problems with this story — and one big one for income investors. New Media isn’t actually funneling profits to investors. Rather, it’s funding the dividend through steady issuance of NEWM stock — usually at below-market prices. These offerings also involve hefty incentive fees for , New Media’s external manager. (Fortress now is owned by Softbank (OTCMKTS:SFTBY).)

And so investors aren’t really ‘earning’ a dividend. Rather, their ownership is being diluted for cash. With NEWM stock now at an all-time low, it seems like the market finally is catching on.

But even those lows don’t look low enough. I called NEWM stock ‘toxic‘ a year ago and still believe that’s the case. Unsurprisingly, New Media’s revenue and profits keep falling outside of the contribution from acquisitions. The strategy is the same that sent predecessor GateHouse Media into bankruptcy. And the company still is buying yet more papers, instead of using a ‘cigar butt’ strategy that focuses on returning actual cash to shareholders, not just selling NEWM shares to fund more acquisitions.

As such, NEWM looks like a true yield trap. A 15% yield might seem attractive, but it’s unlikely to last unless New Media changes its strategy, and its ways.

As of this writing, Vince Martin has no positions in any securities mentioned.

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