If you’re combing the markets looking for the best dividend stocks to buy, you’re not alone. In today’s low-rate environment, yield is hard to find.
Ten-year Treasuries pay just 2.1% right now — still enough to attract a few low-risk investors here and there, but not nearly enough for the more yield-hungry among us.
And with talks of a bond bubble seemingly growing louder by the day, investors are turning to dividend stocks, many of which offer tantalizing yields that far surpass T-notes.
The problem is that, for one reason or another, dividend stocks can be more dangerous than they seem. Let’s take a look at 10 dividend stocks in particular that you should avoid … and what makes them stinkers.
Dividend Stocks Wasting Your Time: Walmart (WMT)
WMT Dividend Yield: 3.4%
Why to Avoid It: Growth is hard to come by, profits are slipping
At first glance, Walmart (WMT) looks like one of the more ideal dividend stocks to buy. The 3.4% dividend yield, 40 straight years of dividend growth and the retailer’s ubiquitous presence make WMT seem like a no-brainer.
Looking a bit closer, things aren’t so clear.
Current shareholders will recall, with a cringe, that WMT stock recently suffered its worst single-day decline in 15 years, falling more than 8% after quarterly earnings.
It wasn’t earnings that crushed Walmart stock, though, it was a warning about future earnings. Management now expects next fiscal year’s profits to fall at a rate somewhere between 6% and 12%. That was a little off the consensus forecasts calling for EPS growth around 5%.
The stock is now off 33% this year, and the company is doubling down on improvements to its brick-and-mortar retail experience precisely when its largest rival in online retail, Amazon.com (AMZN), soars to all-time highs.
Dividend Stocks Wasting Your Time: Campbell Soup (CPB)
CPB Dividend Yield: 2.4%
Why to Avoid It: Dramatically overpriced
If you go to Walmart, you’ll find many a product of Campbell Soup (CPB) in the food aisle. Just remind yourself not to buy its stock because you enjoy its brand of clam chowder.
As far as the CPB dividend is concerned, it’s nothing to write home about in the first place. Campbell shares yield only marginally more than the 10-year Treasury, and CPB hasn’t raised its dividend since 2013.
On top of that, the stock itself looks like a lousy investment. CPB trades for nearly 19 times next year’s earnings, a multiple higher than the average stock in the S&P.
The problem is, Campbell Soup isn’t even as good as the average S&P 500 stock, from a growth perspective; analysts expect EPS to grow by a mere 5.3% in fiscal 2016 and 6.2% in fiscal 2017.
That kind of growth is hardly deserving of that kind of forward multiple.
Dividend Stocks Wasting Your Time: Archer Daniels Midland (ADM)
ADM Dividend Yield: 2.4%
Why to Avoid It: Yields barely more than Treasuries
Agricultural powerhouse Archer Daniels Midland (ADM) might deceptively look like a worthwhile dividend stock on the surface: It boasts 39 years of dividend growth, and has a modest payout ratio of 36%.
Still, at 2.4% per year, it’s barely beating out the T-note.
Plus, you ideally want to buy dividend stocks that have consistent returns year after year. ADM is massively exposed to commodity price volatility, as well as foreign exchange risks.
ADM has also managed to underperform the S&P 500 over the past five years, returning 56% to the S&P’s 75%.
Dividend Stocks Wasting Your Time: Yum! Brands (YUM)
YUM Dividend Yield: 2.5%
Why to Avoid It: Yield doesn’t compensate for risk
Yum! Brands (YUM), like ADM, also pays a modest yield just above 10-year Treasury rates. That’s all well and good, but the reason YUM is one of the most ho-hum dividend stocks on Wall Street actually resides in China.
There, in the world’s second-largest economy, lies YUM’s crown jewel — or at least what investors believed was its crown jewel until just recently.
The company owns the KFC, Pizza Hut and Taco Bell brands, and the two former fast food chains are immensely popular in China. But last quarter, the sluggish Chinese economy caught up to Asia’s KFCs and Pizza Huts, and Chinese same-store sales growth posted a truly horrendous miss last quarter (2% vs. 9.6% estimated), the likes of which I personally have never seen before in the restaurant industry.
Although the company will be spinning off YUM China in light of the news, I wouldn’t touch this one until the two companies are completely separate.
Dividend Stocks Wasting Your Time: McDonald’s (MCD)
MCD Dividend Yield: 3%
Why to Avoid It: Stagnant growth, high competition
In other words, between late 2011 and last week, McDonald’s stock price hovered right around the $100 per share level — and for good reason. The company was stuck between a rock and a hard place as North American same-store sales growth dropped like a rock, eventually turning negative. MCD had to go find a new CEO earlier this year and institute a turnaround project to get things back on track.
Still, North American same-store sales rose just 0.9% year-over-year, which won’t be able to move the needle in the long-run. And with global revenue actually falling by 5% in the third quarter, why invest in an old brand of yesteryear with no ostensible way to grow meaningfully?
Some blue-chip dividend stocks aren’t all that great when you look at them up close, and MCD is one of them.
Dividend Stocks Wasting Your Time: Keurig Green Mountain (GMCR)
GMCR Dividend Yield: 2.2%
Why to Avoid It: Misallocation of capital, potential for huge losses
There’s no such thing as risk-free dividend stocks, but some are safer than others. Investors in Johnson & Johnson (JNJ), for instance, can sleep fairly easy at night knowing they’ll receive their dividend quarterly as scheduled for the foreseeable future. That’s what 52 years of dividend growth and a cash cow machine will do for you.
Keurig Green Mountain (GMCR) is quite a different company, however — only initiating its dividend in 2014 — and I consider it to silently be one of the riskier dividend stocks that trades today.
In 2014, the coffee brewer manufacturer bought back $1.05 billion of its own stock, in a year where the GMCR stock price fluctuated between $75 and $158 a pop. Then, in February, the company spend $624 million to buy back shares at an average price of $119 per share.
With the stock currently trading around $55, those buybacks have been enormously destructive to shareholder value. And given that the overpriced and delayed Keurig Kold, the company’s home soda brewing machine, won’t fully roll out until the 2016 holidays, it’s no wonder famed short seller and hedge fund manager David Einhorn loves to short this stock over and over again.
Dividend Stocks Wasting Your Time: Noble Corp (NE)
NE Dividend Yield: 4.6%
Why to Avoid It: Recently slashed dividend, lower energy prices
If there were ever a reason to avoid a dividend stock, the fact that the company freshly slashed its dividend within the past week certainly would be a good one.
Investors can now expect to receive 15 cents per share every quarter instead of the 37.5-cent payments they’d grown accustomed to. As an offshore oil and gas contract driller, NE is seeking to proactively keep itself in a good cash position as energy prices remain subdued.
While a yield of 4.6% may still look tempting, just remember, last week it was 11.5%.
There’s no rule saying it can’t fall farther.
Dividend Stocks Wasting Your Time: Helmerich & Payne (HP)
HP Dividend Yield: 4.9%
Why to Avoid It: Potentially unsustainable dividend
Like NE, Helmerich & Payne (HP) is a contract driller in the oil & gas area. And, like NE, the downturn in energy prices isn’t doing the company any favors.
Despite having a rock-solid record of dividend growth — HP has increased its dividend payment annually for 42 years now — that streak may soon be broken. In fact, with the company paying out a whopping 92% of it profits to shareholders, HP may have to reduce its payout ratio and cut its dividend like NE, in the name of liquidity.
Cut or no cut, there are better dividend stocks out there for your money than HP.
Dividend Stocks Wasting Your Time: Occidental Petroleum (OXY)
OXY Dividend Yield: 4.1%
Why to Avoid It: Slumping oil prices put pressure on dividend
It just so happens that most of the dividend stocks investors should avoid in the stock market today are energy companies. That’s a natural byproduct of the fact that oil prices have been trading at or below $60 for much of the year, with the $40 to $50 range being more prominent recently.
Occidental Petroleum (OXY), an oil and gas exploration and production company, is no different. While offering a thick 4.1% dividend yield, it also comes with a high degree of risk. Not only will the OXY stock price continue to fall with the price of oil — it’s down 20% in the last year alone — but its dividend will become less stable.
The OXY dividend could be at risk if oil prices remain in the gutter for an extended period of time, as an estimated 46% of its cash flows go directly toward dividend payments — a high ratio for the industry.
Dividend Stocks Wasting Your Time: ConocoPhillips (COP)
COP Dividend Yield: 5.6%
Why to Avoid It: Surprise, surprise — commodities woes pressure the dividend
Yet another company from the basic materials sector, ConocoPhillips (COP), plagues today’s list of dividend stocks not worth your consideration.
Like OXY, ConocoPhillips is and oil and gas explorer and producer. It also moves and markets those commodities, so as you might imagine, the past year has been tough on COP.
The stock price is down 24% in the last year, and analysts expect COP to lose 67 cents per share in 2015 against a profit of $5.30 per share just a year ago.
Since payout ratios — the percentage of profits a company pays out in the form of dividends — become meaningless when a company isn’t making money, cash flows become a preferable measure of how sustainable current dividend payments are.
COP uses an estimated 39% of its cash flows to pay dividends right now, which is more than competitors like BP (BP), Chevron (CVX) and Exxon Mobil (XOM), which will use an estimated 30% of cash flows to pay dividends, on average. There are safer payouts out there.
As of this writing, John Divine was long shares of AMZN stock. You can follow him on Twitter at @divinebizkid or email him at firstname.lastname@example.org.
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