Everyone’s looking for yield … but don’t chase it blindly.
One of the biggest mistakes you can make is going after income chasing yield in unfavorable stocks. Stocks with poor fundamentals can fall in price to the point where the dividend yield appears quite compelling — 4% or even 5% or more — but don’t bite. The fundamentals of the company are still in decline, and the large institutional investors are dumping the stock. The added selling pressure can take the shares down by 20% or more, rendering the dividend payout insignificant.
Fortunately we have Portfolio Grader to help us identify those high-yielders with low potential that are better left untouched.
One such stock is Garmin (GRMN). This was once a fabulous growth stock as GPS devices took off as people used them to navigate road trips and outdoors adventuring. But GPS devices are now built into our vehicles and even our smartphones, and sales of their products have declined — as have profit margins. The stock has been in steady decline for years, and the stock now yields over 5% — which might look appealing if we didn’t look deeper. Fundaments have fallen apart much quicker than Wall Street anticipated and the estimates for the rest of the year have been in steady decline. Portfolio Grader has downgraded the stock from a “buy” a year ago — today Garmin receives an “F” and is a strong sell.
Not too long ago shares of Cypress Semiconductor (CY) traded for twice where they’re at today. The sustained decline in price has led to a stock that appears to be a real dividend bargain with a yield of 4%. But sales and earnings have continued to decline as global semiconductor demand has weakened. Sales are in a state of decline and margins are under pressure from higher production costs, pressuring bottom-line profits. It doesn’t look like business will improve anytime soon as analysts are reducing estimates for the rest of this year and all of 2014 as well. The stock has been a poor performer for some time and has been rated as a “sell” or “strong sell” for more than a year now. Currently Cypress has fallen all the way to the bottom and carries an “F” rating from Portfolio Grader.
Many investors thought that the weight management and fitness company NutriSystem (NTRI) had righted the ship when the shares appeared to put in a bottom and quickly double back in 2010. Fundamentals continued to decline, however, and the stock has once again fallen into a steady slide. Today the stock has fallen back into single digits and sports a dividend yield of about 8%. Management is still warning of customer retention problems and sales are expected to decline though at least the end of 2013. The dividend is not covered by profits, and there is a good chance it will be slashed (if not eliminated entirely) as part of the restructuring and turnaround process. The stock is a “strong sell” and should be avoided or sold at the current time.
Even when hunting for dividends, investors need to keep an eye on fundamentals and buy only the very best stocks. Avoiding the worst ones can help prevent losses far in excess of any income received — and improve long-term performance and secure a steady flow of dividends.
Louis Navellier is the editor of Blue Chip Growth.