There are two things that everyone should know about dividend stocks:
- They’re long-term holdings, so you can take advantage of their dividend.
- Solid, reliable dividends are much better than sexy double-digit payouts.
Now, most of the five dividend stocks we’re about to cover have large yields — but that doesn’t make any of them a buy.
These dividend stocks are all in “falling knife” sectors — and as you know, you don’t want to try to catch a falling knife. These stocks are the poster children for various sectors that haven’t bottomed yet and certainly aren’t recovering.
Many of these companies are credible global players that won’t disappear. At some point, they might even be reasonable buy candidates. But for now, despite their impressive yields, you’ll want to avoid or dump these stocks.
Dividend Stocks to Dodge or Dump: Royal Dutch Shell plc (ADR) (RDS.A)
Dividend Yield: 8.6%
A shining example of a good stock with a huge dividend in a bad market is big oil Royal Dutch Shell (RDS.A).
The stock is currently yielding well more than 8% — that’s pretty impressive, to be sure.
The problem is, RDS.A is in the midst of acquiring BG Group (formerly British Gas) a major natural gas player in the UK. It’s a $70 billion deal that just got past its final hurdle.
Even as it was closing deal, however, RDS.A announced that it is going to have cut 10,000 jobs because of low oil prices. Nat gas prices aren’t much better. Now that Shell has a massive merger to pay for and it has cut as much as it can, the next thing to go could be the dividend.
Dividend Stocks to Dodge or Dump: Ambev SA (ADR) (ABEV)
Dividend Yield: 3.1%
Ambev (ABEV) is Latin America’s largest brewer and one of the world’s largest carbonated beverage owners, bottlers and distributors. Beer brands like Brahma and Stella Artois are in its stable.
The problem is twofold. First, the ABEV is headquartered in Brazil. And Brazil is going through economic turmoil right now, as well as many other Latin American economies. That is not good for sales.
Second, ABEV is 62% owned by AB Inbev (BUD) the world’s second-largest brewer. BUD is trying to buy No. 3 brewer SAB Miller (SBMRY) and there is little visibility what effect this will have on ABEV in the short and intermediate term.
These are two significant issues of uncertainty, and the market hates uncertainty. There are plenty of other stocks yielding 3.2% that are in much better shape right now (see last week’s article).
Dividend Stocks to Dodge or Dump: America Movil SAB de CV (ADR) (AMX)
Dividend Yield: 3.5%
America Movil (AMX) is a major Latin American telecom player both in wireless and landline. And it has been so successful that CEO Carlos Slim is the richest man in Mexico and is No. 2 in the world (he’s worth about $79 billion). No. 1 is Bill Gates.
The problem with AMX at this point is that the Mexican government has decided it wants to encourage competition with AMX, so it has sold some frequencies to U.S. telecom major AT&T (T) and Spanish telecom giant Telefonica (TEF).
Add to this the fact that its entire region is getting slammed by the global economy, and you can understand that it has a couple very serious challenges ahead.
Its decent 3.6% dividend yield is likely safe, but the prospects for the stock are very much in question right now, and there’s little upside near-term.
Dividend Stocks to Dodge or Dump: Cummins Inc. (CMI)
Dividend Yield: 4.4%
Cummins (CMI) is a diesel engine maker for industrial, commercial and consumer markets. It also build electrical generators.
The single biggest challenge for right now and for the foreseeable future is, if there’s nowhere on Earth where growth is good, then there’s no building going on and no demand for CMI’s products.
Clessie Lyle Cummins started the company in 1919 and he built and designed those engines. In 1940, CMI offered the first 100,000-mile warranty.
CMI played a big part in the WWII war effort and is as American – still based in Indiana – as apple pie. It’s the global exposure that’s really hurting now, especially with the strong dollar. Its entire market is not doing well right now.
Cummins’ 4.3% dividend is certainly tempting, but the risks at this point aren’t worth the gamble.
EDITOR’S NOTE: Deletes reference to a Cummins engine winning the first Indianapolis 500.
Dividend Stocks to Dodge or Dump: Potash Corporation of Saskatchewan (USA) (POT)
Dividend Yield: 6.1%
Potash Corp (POT) is one of the world’s leading fertilizer companies.
This is another facet of the slow global growth story. Commodities prices, including food, have been low for a long time. If the market is saturated, there’s little need to grow and farm as intensively as needed were demand high.
Moreover, developing economies that were expanding their agricultural sector with modern equipment and products are no longer attractive.
This is why POT has already stated that 2016 is going to be a bad year. In keeping with that promise, POT cut its dividend for the first time by 34%. Some analysts think that cut was too small and that Potash may have to cut it again.
Bottom line: Don’t be a hero. There are plenty of good companies with solid growth prospects and a rock solid dividend.
Editor’s Note: Omits Freeport-McMoRan, which suspended its dividend.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.