With the likelihood of a trio of rate hikes expected this year, dividend stocks have earned a little more than their fair share of bad press. See, as is the case with bond prices, higher interest rates push the value of dividend stocks downward.
That’s not the only headwind working against some of these income-oriented investments, however, which has struck even the bluest of blue-chip dividend stocks. A handful of well-known dividend-payers that people largely own for their payouts may prove surprisingly disappointing for the foreseeable future.
Either these companies can’t afford to continue the payout at current levels, they’re overvalued or these outfits are on the verge of cyclical problems. In some cases, more than one liability may apply.
With that as the backdrop, here’s a closer look at seven blue-chip stocks income seekers may want to avoid until something significant changes; that change may well include a sizeable price setback.
Dead-Weight Dividend Stocks: Ford (F)
Why It’s Dead Weight: Lower profits incoming
More of the same could prove to be a very good year for the company, and the current trajectory is a compelling one … particularly if Trump can truly put the U.S. economy in higher gear and more money in people’s pockets.
Investors may not want to put the cart too far in front of the horse, however. Any impact Trump may have could take months if not years to reach full speed. A big chunk of the Trump plan calls for Ford and its peers to keep production here at home, where it costs more. That eats into earnings. Profit margins are already a narrow 4.7%, and even-thinner margins won’t exactly give the carmaker a major motivation to share more of the wealth with shareholders.
That’s not to say the current quarterly dividend of 15 cents per share is in jeopardy. It is to say, though, the recent rise in the value of F shares (up 11% since the election) could be tough to justify in the foreseeable future. Remember, even Ford itself warned in September that its 2017 profits would roll in lower than 2016’s, as bigger-picture demand continues to deteriorate. Not that much has changed for the better in the meantime.
Dead-Weight Dividend Stocks: Caterpillar (CAT)
Why It’s Dead Weight: Deterioration of mining; Hefty payout ratio
The headwind Caterpillar Inc. (NYSE:CAT) has faced since 2015 is well documented. Not only did a deterioration of the mining and drilling business take a toll on the company’s top and bottom line, the U.S. dollar’s multi-year ascension has made it nearly impossible for Caterpillar’s all-important overseas customers to afford its equipment. It’s barely broken even over the course of the past four reported quarters, versus 2014’s net income of $3.7 billion.
This hasn’t prevented CAT from paying a dividend, even though doing so hasn’t always been easy over the course of the past couple of years. In fact, Caterpillar’s continued increase in its payout even when things were fiscally lean is admirable, even if a bit uncomfortable. Caterpillar is paying 77 cents per share now, versus only 70 cents per share two years ago.
But the budding economic revival and recovering commodity prices will turn the company’s fortune around before time catches up with the company? Maybe. But, not only has the dollar not peeled back to more beneficial levels for the company, it actually ran to new multi-year highs late last year. That means at least part of the company’s headwind has persisted through the end of last year. And the expectations aren’t high to begin with. The pros expect earnings to fall from 74 cents per share to 66 cents for last quarter, with sales expected to fall similarly. The current quarter results will feel that pain as well.
The greenback is largely expected to pull back as 2017 wears on, but there’s not a lot for CAT shareholders to be excited about at least through the next quarterly report.