by Kyle Woodley | February 17, 2012 10:09 am
Dividend stocks are an investor security blanket during periods of market instability. Rather than hoping every stock you pick is a rock-solid growth story for years to come, dividend stocks offer their shareholders a reliable revenue stream that can help make rocky times feel … well, not quite so rocky.
But while a dividend is security, it’s not a guarantee. Struggling companies — think General Motors (NYSE:GM) in 2006 or General Electric (NYSE:GE) in 2009 — can clip those payouts. And even the highest yield can be overshadowed by large share declines, such as Frontier Communications (NYSE:FTR), which plummeted about 50% in 2011 despite a decent dividend.
So, investors looking to make long-term income investments should be warned: Don’t chase a high dividend yield if the road is peppered with potholes.
The following three widely held companies are examples of high-dividend stocks with shaky futures that are better left untouched:
Grocery stores aren’t going anywhere, I promise. But things aren’t getting any better. Grocery stocks traditionally have low growth rates and limbo-low profit margins. In the past few years, SuperValu (NYSE:SVU) and others have faced increasing pressure on all sides. Bargain retailers like Dollar Tree (NASDAQ:DLTR) have increased their food and beverage offerings, threatening grocers on the low end. Meanwhile, Whole Foods (NASDAQ:WFM) — a favorite of InvestorPlace writer Lawrence Meyers — and Trader Joe’s are riding the rising tide of health-conscious consumers craving organic foods, as well as fresh meat and fish offerings.
The prospects for SuperValu don’t look great. Analysts expect earnings to drop 11% this year and stay flat in 2013. Five-year earnings growth is slated at about just 1.5%. The company recently announced it was cutting about 800 jobs this month to bank about $30 million in pre-tax savings. Streamlining is an important part of running an efficient business, but it’s sure not a sign of growth, either.
Meanwhile, SuperValu shares are down 85% off their June 2007 peak around $40 and haven’t shown signs of life for years. SVU’s 5.2% dividend yield might seem attractive, but looks much less so considering the steep losses for this stock.
Pharmacy stocks are among the highest-yielding dividend stocks out there, and AstraZeneca (NYSE:AZN) is no exception. But pharmacy stocks also are among the most vulnerable. Pharma companies that don’t have new drugs constantly coming down the pipeline to replace expiring patents risk huge hits to the balance sheet once their blockbusters go generic.
Within the next five years, AZN will watch patents expire for segment leaders Crestor, Nexium, Seroquel IR, Symbicort and Synagis, among others. And in 2014, Teva Pharmaceuticals (NASDAQ:TEVA) will be able to offer a generic version of Nexium, which alone could cost the company billions. AstraZeneca’s pipeline isn’t bare by any means, but right now, it has more holes than plugs.
AstraZeneca does trade at a dirt-cheap 7 times 2013 earnings, and restructuring is expected to yield almost $2 billion in annual savings starting in 2014. But the stock has spent the last year trading down by 7%, and it’s bucking the 2012 bull market so far, 2.6% lower since Jan. 1.
And earnings projections don’t look good: AZN’s profits are expected to dip 15% this year and barely nudge upward in 2013. Five-year anticipated growth is a measly 2%, while the rest of the industry is expected to grow 10%. That doesn’t leave much room for error, and clinical trials are far from a slam dunk.
RadioShack’s (NYSE:RSH) gigantic yield is about the only thing going for it — and that’s partially a product of its falling share price, which has plunged more than 50% in the past year. The electronics retailer has been under pressure from bigger competitor Best Buy (NYSE:BBY) and online titan Amazon (NASDAQ:AMZN) for years. Frankly, it’s hard to understand how RadioShack is even still around.
Next week, the company is expected to report a 75% drop in quarterly earnings and a 45% decline for the full year. Next year’s earnings are slated to fall another 15%. In fairness, RSH shares are cheap — they’re near financial-crisis lows and trade at 7 times earnings. But the lack of growth hints that RadioShack is more a value trap than a value.
If you want to chase a no-growth stock with big yield, take a page from RadioShack’s playbook and team up with mobile. Namely, AT&T (NYSE:T) and Verizon (NYSE:VZ) and their respective 5.8% and 5.2% yields. Shares might not go anywhere, as recent performance indicates, but this telecom duopoly and their dividends aren’t going anywhere, either.
RadioShack, on the other hand, is far from indispensible.
Kyle Woodley is the assistant editor of InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities. Follow him on Twitter at @KyleWoodley.
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