It has been a difficult year, to say the least, for income investors.
The days of 5%-plus yield chasing and bargain buying have been few and far between this year. Blue-chip stocks and real estate investment trusts have risen to levels where upside potential is limited, leaving the very real risk of the decline in shares outpacing annual dividend payments.
This who chose the master limited partnership sector for income have seen dividends slashed across the board, along with disastrous price declines year-to-date. But the actual bad news is that it is probably not going to get much better for income investors in 2016.
The economy is not strong enough for the Fed to raise interest rates in a meaningful way. It is more important than ever that careful selection and analysis are used to avoid income securities with higher risk of loss.
High-Yielding Dividend Duds: Cypress Semiconductor (CY)
Dividend Yield: 4.3%
Year-to-Date Loss: 28%
Cypress Semiconductor (CY) is a good example of a stock that most income investors should avoid. At first blush, it is a solid choice with a generous 4.3% dividend. Digging a bit deeper, however, reveals a company that is bleeding money, so it is not deserving of its high-yield by paying its dividends out of corporate resources and cash flows flirting with $50 million in the red over the past year.
If Cypress earns the 68 cents a share that analysts expect next year, it will be paying out 65% of earnings in the form of dividends. The semiconductor industry on average pays out less than 40% of earnings as dividends, so Cypress pays out a much higher percentage than its competitors.
Not to mention that business has been weak and the Piotroski F-score of just 4 (on a 9 point scale) indicates that it is not getting much better anytime soon.
High-Yielding Dividend Duds: Avon Products (AVP)
Dividend Yield: 7.9%
Year-to-Date Loss: 67.6%
If looks could kill, a glance at Avon’s (AVP) nearly 8% dividend would be drop-dead enticing. But looks are deceiving, as AVP stock is off nearly 70% YTD.
The problem? Avon’s largest market is in Brazil, and the Brazilian economy is in horrible shape, and the stronger U.S. dollar isn’t doing the Brazilian real any favors.
Right now it does not appear that earnings or cash flow will be enough to cover AVP’s dividend payment in 2015 or 2016, and a cut or outright elimination of its payout would not come as a surprise.
Avon has tossed around the idea of putting itself up for sale, but there doesn’t seem to be much interest at this point in time as AVP earns an F-score of just 3, so business is unlikely to improve much over the next year.
Don’t let the high yield and brand name fool you. This stock is toxic for income investors.
High-Yielding Dividend Duds: Lexmark (LXK)
Dividend Yield: 4.3%
Year-to-Date Loss: 19%
Lexmark (LXK) is another stock that may turn out to be a dividend trap.
A little background: LXK makes printers and accessories and also provides document management services to corporations. Lexmark is a well-known brand and I, like most, have a Lexmark printer in the house.
However, the competitive printer and supplies business is in decline, forcing Lexmark to cut back on its all-important acquisitions and stock buyback program it was hoping would help grow both the company and stock price.
The initial impression of a worldwide recognizable brand and a yield of 4.3% is attractive, but the company is paying out over 40% of earnings which is well above its industry average of just 27%.
The F-score of just 4 indicates that fundamentals are weak and not improving, so upside could be limited; and if another market downturn hits, or Lexmark continues to struggle with earnings, LXK stock will fall a great deal more than the current $1.44 a year payout.
As of this writing, Tim Melvin did not hold a position in any of the aforementioned securities. He is the author of the Banking on Profits newsletter covering the community bank stock opportunity and the Deep Value Report that seeks out undervalued stocks that are likely to survive until they thrive and capture the value effect that has been proven to beat the market over time.