When shopping for dividend stocks, the biggest mistake you can make is buying yield without checking out the company’s fundamentals. This has been particularly true in recent months of those buying traditional blue-chip dividend stocks.
Many investors think that because these companies are so large, they are automatically safe investments.
This couldn’t be further from the truth.
Even very large companies have ups and downs in their business, so it is critical to avoid those experiencing weak fundamental conditions. A 20% decline in the price of your stock can quickly eliminate the advantages of a 4% dividend yield.
Here are three such stocks that might not be such great buys right now:
Energy titan Exxon Mobil (XOM) is a company that is thought of as a safe dividend stock, but that also has very poor fundamentals right now. The largest publicly traded oil and gas company is not immune to the margin pressures caused by lower natural gas prices and weaker demand for petroleum products. Revenues have been declining for the company for the past four quarters and profits are flat. The fundamental deterioration caused Portfolio Grader to downgrade the stock to a “D” back in April, and shares have retained this “sell” recommendation ever since.
AT&T (T) has been a leading candidate for income for decades, and at 5%, it’s currently the highest-yielding stock in the Dow Jones Industrial Average. However, right now the fundamentals of the company just do not merit consideration. While it enjoys something of a duopoly with Verizon (VZ), the U.S. wireless business is no less fiercely competitive — in fact, AT&T has been losing subscribers to its main rival, as well as providers who offer service without long-term contracts. Its landline business continues to decline as well. The fundamentals have steadily declined, and last month Portfolio Grader downgraded T shares to a “D,” suggesting that investors sell.
Despite its controversial business, Altria (MO) has long been loved thanks to its status as a dividend haven. However, the leading domestic cigarette manufacture is facing pressure from an increasingly hostile tax and regulatory environment, as well as competition from alternatives such as electronic cigarettes. The additional tax increase proposed by the president would further hurt sales and profits from Altria. The headwinds have damaged the company’s fundamentals, and Portfolio Grader recently downgraded the stock to a “D,” or “sell.”
Just remember: Shoving your money into dividend-paying stocks without giving any attention to the underlying business can have disastrous results — especially as the market begins to focus more on quality stocks with the best fundamentals. That’s where Portfolio Grader comes in as a useful tool, helping you not only find stocks you should buy, but also those you should avoid for the time being.
Louis Navellier is the editor of Blue Chip Growth.