Beware the dividend trap.
Income investments are not created equal, and some of the stocks with big dividend yields also come with big risks. Dividend yield is calculated by dividing the current annual payout by the current share price. While increasing the dividend obviously boosts yield, a falling share price also inflates the yield -- sometimes dramatically. These "dividend traps" are common, with stocks offering a modest income each quarter that is just a drop in the bucket when accounting for the steep losses in share value absorbed by shareholders. If you are holding one of these nine high-yield stocks, don't be distracted by the dividend. Take a serious look at your portfolio and consider cutting your losses before further declines or worse.
Chico's FAS (ticker: CHS)
CHS is an apparel operator that serves customers via Chico's, White House Black Market and Soma retail names at about 1,500 locations across North America. It's a tough business to keep up with changing consumer tastes and fend off e-commerce alternatives, and CHS stock simply isn't succeeding on those fronts. Don't be fooled by a double-digit yield from this troubled retailer. Though Chico's paid nearly 9 cents a share in this summer's quarterly payout, Chico's is unprofitable and may not be a dividend stock for long unless executives can figure something out. Shares have plunged more than 75% in the last five years, including a more than 40% decline since Jan. 1.
Current yield: 11.2%
Fluor Corp. (FLR)
Engineering firm Fluor has plunged about 70% from its 52-week high, slumping to levels not seen in more than 15 years thanks to a convergence of problems that include a massive $700 million one-time charge, cost overruns that have led to steep losses and the unconventional step of pulling its full-year earnings guidance for 2019 because of future uncertainty. Needless to say, it's hard to trust a stock like this even if it offers a decent yield and has been reasonably consistent with payouts in the past. Theoretically, a boost in infrastructure spending should lift FLR stock -- but it's anyone's guess when that boost would happen and how much farther Fluor may have to fall.
Current yield: 4.8%
Office Depot (ODP)
Brick-and-mortar retail sales of office supplies is a tough enough business for leader Staples, which went private a year ago in a bid to restructure operations away from the prying eyes of public shareholders. For runner-up Office Depot, then, the environment is simply brutal -- and with shares trading for little more than $1 at present, it shows. To be clear, ODP still turns a modest profit and its payout of just 10 cents in annual dividends is sustainable. But with shares down more than 60% in the last 12 months, that potential income comes with a serious cost.
Current yield: 7.5%
Chemours Co. (CC)
Chemours Co. was created in a 2015 spinoff as part of a complicated merger between chemical companies DuPont and Dow. Chemours was taken out as an independent entity in charge of specialty coatings. A flood of injury claims related to potentially cancer-causing chemicals used in its nonstick Teflon coating slammed the stock as it has lost the deep pockets of a larger organization. The result is a company that is nicely profitable and pays 25 cents each quarter in dividends, but the threat of massive liability has undercut the stock. This makes it very difficult for long-term, risk-averse income investors to stick with CC shares.
Current yield: 7.2%
Macy's has tons of interest among day traders who are looking for short-term moves, but remains a troublesome stock for dividend investors. It's a retailer with decent brand history but plenty of big problems thanks to aging department stores and the uphill climb against other online merchants. That's evidenced by anemic performance in the retailer's last few earnings reports, and revenue that should decline slightly this fiscal year and remain flat at best next year, too. The dividend isn't as at-risk as in other companies, but a 60% decline since last fall proves shares of Macy's come with plenty of downside risk.
Current yield: 10.2%
Summit Midstream Partners (SMLP)
Summit is a smaller energy partnership that operates related businesses around U.S. shale fields but not actually exploring for oil and gas itself. Such "midstream" energy businesses are attractive because they are not as exposed to commodity price risk and the uncertainty faced by exploration firms. The fundamental appeal of a midstream energy stock, however, is consistency and income potential. After SMLP slashed its distributions from 57.5 cents early in the year to 28.8 cents presently, that appeal has been tempered. The headline yield is huge, but that's clearly because Wall Street doesn't expect this company to have the cash to cover even smaller paydays going forward.
Current yield: 23.9%
Tupperware Brands Corp. (TUP)
You likely know Tupperware's brand name, but ask yourself honestly how many times you've purchased one of its well-known storage products in the last year. There's simply not tremendous regular demand for these goods. And, with all the competition, the growth path for TUP is increasingly challenged -- as evidenced by a projected 10% decline in revenue this fiscal year. The dividend is roughly a third of earnings, meaning it's pretty safe. TUP shares are down almost 60% in the last 12 months, an indicator that the company's payouts alone are not enough to keep income investors happy.
Current yield: 8.8%
In the wake of a recent merger between Ensco and Rowan Companies, newly mashed-up offshore driller Valaris has burned a ton of cash. That includes a draw into its revolving credit facility, but also overtures about raising even more capital in the near future. While the combined entity is the largest offshore outfit in the world, the financial structure behind it is raising some questions. This kind of expensive corporate restructuring would be challenging for any business, let alone the highly volatile and recently unreliable offshore energy industry. These factors mean VAL is a high-risk dividend play that isn't for the typical investor's portfolio.
Current yield: 3.4%
Realogy Holdings Corp. (RLGY)
Realogy Holdings is a real estate and relocation service company that works for businesses that want to retain or acquire top talent but require expertise attracting that staff to their local area. The rise of telecommuting and video conferencing makes the need for on-site employees less acute, and the wide array of online options make it easier than ever before to learn about a new neighborhood. In a digital age, it's hard to imagine Realogy's client demand is set for growth. RLGY's dividend is comfortable at less than half of total earnings, but a slow decay seems inevitable -- as evidenced by share priced that have plunged more than 85% in the last two years.
Current yield: 7.5%
Income stocks ripe for selling:
-- Chico's FAS (CHS)
-- Fluor Corp. (FLR)
-- Office Depot (ODP)
-- Chemours Co. (CC)
-- Macy's (M)
-- Summit Midstream Partners (SMLP)
-- Tupperware Brands Corp. (TUP)
-- Valaris (VAL)
-- Realogy Holdings Corp. (RLGY)
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