Dividend stocks are often most alluring when they are at their most dangerous.
Sure, it’s hard resist dividend stocks yielding more than, say, 10%, but it’s critical that you know where that yield comes from. Crazy-high yields on dividend stocks are usually a sign of trouble — even for real-estate investment trusts, utilities and telecommunications companies that are supposed to sport fat yields.
As with bonds, the yield on dividend stocks will rise as the price falls. If a stock’s price falls so much that the dividend is hitting double-digits, the market is probably trying to tell you something about its health.
Recognizing that relationship is critical because troubled companies have a nasty habit of cutting or suspending their dividends in order to conserve cash, and anything that messes with dividends is guaranteed to dividend stocks tumble. JCPenney (JCP), for example, dropped 20% in a single session following a divided cut back in 2012 (and it hasn’t been a worthwhile buy ever since).
There is no shortage of dividend stocks yielding more than 10% — a yield that’s essentially the same as a junk bond. We found more than 85 of them after running a simple screen, and many of them are large, legitimate companies — not unstable, speculative microcaps. But that doesn’t mean you should buy them.
Here are five dividend stocks with dangerously high yields that you would do well to avoid:
Market Cap: $15.4 billion
Dividend Yield: 10%
YTD Price Performance: -32%
VimpelCom (VIP), a sprawling Russian telecommunications company with more than 200 million mobile subscribers, is not having a good couple of years.
The Securities and Exchange Commission and Dutch authorities are investigating the company over alleged fraud in its Uzbekistan unit. Additionally, the telecom controlled by Russian billionaire Mikhail Fridman just wrote down the value of its Ukrainian business by $2 billion because of the political unrest there.
With all those troubles, the company posted a net loss of $1.4 billion on a 7% drop in sales for its full fiscal year. Don’t be surprised if this dividend stock falls further on more write-offs and dividend cuts in the near future.
Alto Palermo (APSA)
Market Cap: $497 million
Dividend Yield: 10%
YTD Price Performance: -22%
Alto Palermo (APSA) is a REIT that owns and operates shopping centers as well as residential and commercial complexes. As a REIT, it is required to pay out most of its earnings in dividends, and there’s nothing inherently fishy about a REIT with a yield of 10%.
The only thing really wrong with Alto Palmero is beyond its control: It’s located in Argentina. With an unofficial inflation rate running as high as 25% (no one believes the official figures), capital flight and currency controls, rapidly rising wages, and an interventionist government, Argentina isn’t particularly attractive to investors these days.
Regardless of the fundamentals, the sentiment on Argentina is too negative to take a risk with APSA stock.
Atlantic Power (AT)
Market Cap: $326 million
Dividend Yield: 13%
YTD Price Performance: -19%
Atlantic Power (AT) is a small-cap electric utility that sells power to other utilities and corporate customers. Shares have plummeted because a weak power market forced AT to cut its dividend by 65% last year. What’s worse is that even though Atlantic Power refinanced its heavy debt load, the market is still worried that it could cut the dividend again in the not-too-distant future.
Furthermore, some restive shareholders didn’t want the company to buy time by restructuring its debt (a very expensive way to go). Rather, they wanted the company just to sell itself to a bigger operator.
As attractive as the 12.6% yield might be, you can’t count on it — and that’s always a dealbreaker when it comes to dividend stocks.
Centrais Elétricas Brasileiras Eletrobras (EBR)
Market Cap: $3 billion
Dividend Yield: 18.4%
YTD Price Performance: -14%
Centrais Elétricas Brasileiras (EBR) — also know as Eletrobras, Latin America’s largest utility company — is also taking a hit for reasons well beyond its control.
Brazil had the third-highest electricity prices in the world until the government targeted a reduction of 20% as part of stimulus program. That took a huge bite out of Elertrobras’s margins. For the most recent fiscal year, Electrobras posted a net loss of $3.4 billion, all because the government forced to accept lower prices. Analysts forecast Electrobras to book a net loss this year, too.
The current economic and political environment makes it hard to see what possible catalyst could pull EBR stock out of negative territory any time soon. EBR’s payouts have been erratic, so the stock’s dividend yield is basically a roll of the dice. Worst of all, EBB still has no profits. For dividend stocks, that’s another dealbreaker.
Grupo Financiero Santander Mexico (BSMX)
Market Cap: $14.9 billion
Dividend Yield: 11.4%
YTD Price Performance: -20%
Grupo Financiero Santander Mexico (BSMX) is the Mexican arm of Banco Santander (SAN), the sprawling Spanish bank. Like its parent, BSMX is having a tough time. BSMX plans to issue $1.18 in dividends in the next 52 weeks, which would be a yield of 11.4%, based on current prices. But even that isn’t enough to make up for the troubles it’s facing.
Profit fell 29% for the most recent fiscal year on much higher provisions for loan losses, and analysts aren’t expecting business to get better this year. Indeed, BSMX stock has suffered a slew of analyst estimate cuts and downgrades recently.
Most worrisome is that the Mexican banking sector and economy is doing fairly well. The profitability problems at BSMX are company-specific, including “an inflated 2013 profit base,” according to analysts at Citigroup.
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As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.