5 Dividend Darlings to Dump Now

by Jeff Reeves | September 9, 2013 11:48 am

SellTrash185[1]A lot of investors are taking shelter in dividend stocks right now.

The market is choppy and the surge in stocks since January might be coming to a close, particularly as we face another debt ceiling debacle and the prospect of all-out war in Syria. Meanwhile, interest rates are rising, putting pressure on bonds and leaving investors looking for better places to protect their capital than longer-duration bond funds.

It makes sense to take shelter in low-risk dividend payers amid this backdrop.

But remember that all dividend stocks are not created equal, and that some companies pose a big risk to your portfolio. If shares fall precipitously, it could offset any income you get, and if those dividends fail to grow over time, then you are better off in an investment that more consistently returns its capital to shareholders.

Here are five stocks you might consider dividend darlings but are worth dumping now:

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Walmart (NYSE:WMT)[3]Walmart (WMT[4]) is the world’s biggest retailer, and certainly has scale and reach. But stability is not growth — and if investors can get a comparable dividend elsewhere, why mess with Walmart?

In its May earnings, Walmart U.S. saw same-store sales slip for the first time in almost two years[5] — an uncomfortable reminder of the bleak run from 2009 to 2011 that featured an ugly streak of nine consecutive quarters[6] of same-store sales declines.

And then in August, the company posted another earnings disaster[7] as sales slumped again.

Heavy spending to enter overseas markets must begin paying off, or else the narrative of sales struggles will persist — since the unfortunate reality is soft sales at Walmart might be indicative of broader consumer troubles beyond localized issues that WMT can control.

WMT stock has only slightly underperformed in 2013 with 7% returns year-to-date vs. 16% for the S&P 500, so there are worse things in the world than being a Walmart investor this year. But shares are off more than 6% in just under a month — a sign that near-term momentum is very negative and that even this seemingly stable retailer can flop in a hurry, offsetting any cushion from the rather ho-hum 2.6% dividend.

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Cisco NASDAQ:CSCO[8]Enterprise tech giant Cisco (CSCO[9]) has outperformed the market in 2013, up about 20% year-to-date. But a look at the charts reveals an unfortunate history where CSCO stock tests the mid-$20 range, then winds up giving those gains right back.

Specifically, Cisco has had real troubles with the $26 mark, only hanging around for a couple weeks in 2010 and never consistently sticking there since the market’s historic highs in late 2007.

It might be time for a pullback yet again — and with just a 2.9% dividend, you can wind up losing much more in the next year than you make via dividends. After all, the fundamentals don’t give any reason for spectacular performance, with meager revenue growth of about 5% projected this year and next, and earnings growth that is similarly anemic.

Yes, CSCO faced very low expectations in 2012 and was a wise value buy at $16 a share. But those valuation arguments aren’t there anymore, and continued pressure in enterprise tech is hurting the stock as evidenced by recent underwhelming earnings[10].

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Coca-Cola[11]Coca-Cola (KO[12]) is another dividend stock with a powerful brand and an enormous reach. Couple that with the 2.9% dividend yield and a massive portion of shares held by Warren Buffett’s Berkshire Hathaway (BRK.B[13]), and it seems natural to call Coke “low-risk.”

However, Coke stock is not all it’s cracked up to be. The stock is up just 6% YTD vs. 16% for the S&P 500, and up just 31% in the last three years vs. a 50% rally for the broader market.

And while Coca-Cola dividends are highly reliable, the company hasn’t really been exceedingly generous with its dividend growth as of late. From 2012 to 2013, Coke dividends increased 9% — nothing to sneeze at, yes, but hardly anything to get amazed over. But with a payout ratio that’s roughly half of earnings, you have to wonder why Coca-Cola is being so miserly.

Maybe it’s because they don’t like their long-term prospects. After all, recent earnings weakness[14] indicates continued pressure on soft-drink sales as Americans drink less sugary sodas, and global growth is increasingly hard to come by for Coke considering its already massive market saturation.

Coke is down more than 11% from its all-time high set in May for a reason. I’m not saying KO is going out of business, but be careful about banking on Coca-Cola as a rock-solid play that won’t lose ground.

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Merck & Co. (NYSE:MRK)[15]Merck (MRK[16]) is a Dow Jones component, a Big Pharma fixture and a core holding for many dividend investors. Seeing as healthcare is one of the most recession-proof sectors out there, what’s not to like about Merck?

Unfortunately, Merck has hardly shown itself a stable long-term player. In the dot-com days, it was trading for over $80 a share, at the 2007 peak it was trading for $60 a share … and now it’s under $50 a share.

Yes, the 3.6% dividend is nice … but you need much more income than that to protect you against these long-term declines.

Merck is hardly on the brink with more than $10 billion in operating cash flow last year and over $18 billion in cash and short-term investments. But it trades for a forward P/E of about 13, so it’s at best fairly valued. Meanwhile, MRK faces long-term threats of generic competition and patent expirations that will continue to pressure earnings.

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Microsoft NASDAQ:MSFT[17]Microsoft (MSFT[18]) seems like the most bulletproof tech blue chip out there, with its dominant Windows operating system and almost $88 billion in cash and investments.

However, the post-PC age is weighing on growth as Windows loses its edge — not to a competitor in desktops and laptops, but to mobile devices like smartphones and tablets.

Microsoft is aware of this and rushing to regroup, but it continues to lag painfully behind in mobile. Take, for instance, the fact that MSFT just sold off sharply after earnings thanks to a $900 million charge[19] related to its Surface tablet. Yes, the tech giant has slightly outperformed the market thus far in 2013. And yes, the price-to-earnings ratio still is a reasonable 10.5 based on fiscal 2015 forecasts.

But the risk of disruption and falling behind is severe[20]. Microsoft is squeezing as much as it can from Windows and its Office software, but mobile trends and competition are clearly working against this stock.

Despite the 2.9% dividend, Microsoft is not as stable as you think.

Jeff Reeves[21] is the editor of InvestorPlace.com. Write him at editor@investorplace.com[22], follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. As of this writing, he did not hold a position in any of the aforementioned securities.

  1. [Image]: https://investorplace.com/wp-content/uploads/2013/09/SellTrash185.jpg
  2. Compare Brokers: https://investorplace.com/options-trading/broker-center/
  3. [Image]: https://investorplace.com/wp-content/uploads/2011/02/walmart.jpg
  4. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  5. first time in almost two years: http://online.wsj.com/article/SB10001424127887324082604578486664288448182.html?cmod=mktw
  6. an ugly streak of nine consecutive quarters: http://www.cnbc.com/id/44874256
  7. another earnings disaster: http://finance.yahoo.com/blogs/breakout/walmart-earnings-miss-exposes-collapsing-economy-davidowitz-142435260.html
  8. [Image]: https://investorplace.com/wp-content/uploads/2012/06/Cisco185new.jpg
  9. CSCO: http://studio-5.financialcontent.com/investplace/quote?Symbol=CSCO
  10. evidenced by recent underwhelming earnings: http://www.fool.com/investing/general/2013/08/14/cisco-earnings-underwhelm.aspx
  11. [Image]: https://investorplace.com/wp-content/uploads/2011/07/Coca-Cola.jpg
  12. KO: http://studio-5.financialcontent.com/investplace/quote?Symbol=KO
  13. BRK.B: http://studio-5.financialcontent.com/investplace/quote?Symbol=BRK.B
  14. recent earnings weakness: http://articles.latimes.com/2013/jul/16/business/la-fi-mo-coca-cola-earnings-soda-consumption-20130716
  15. [Image]: https://investorplace.com/wp-content/uploads/2010/08/MerckLogo-e1282588089406.jpg
  16. MRK: http://studio-5.financialcontent.com/investplace/quote?Symbol=MRK
  17. [Image]: https://investorplace.com/wp-content/uploads/2012/08/MicrosoftNew185.jpg
  18. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  19. $900 million charge: https://investorplace.com/2013/07/did-surface-tablets-kill-microsoft/
  20. the risk of disruption and falling behind is severe: http://slant.investorplace.com/2013/08/microsoft-surface-msft-stock-aapl-goog-amzn/
  21. Jeff Reeves: https://investorplace.com/2011/10/optimism-about-europe-debt-resolution-a-risk-to-market-rally/2011/10/2011/10/2011/10/no-bear-market-for-5-funds-etfs-slv-gld-thd-xrt-fdn/2011/10/author/jeff-reeves/
  22. editor@investorplace.com: mailto:editor@investorplace.com

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