3 Dividend Stocks To Avoid Right Now

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In this age of low interest rates many retired investors are turning to dividend stocks as a way to add income which might supplement pension, Social Security, and annuity payments, part time work, and bonds. Savings accounts yielding fractions of a point aren’t cutting the mustard anymore.

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Previously I penned an article which provided a framework for creating a portfolio of dividend stocks that are likely to produce steadily increasing returns over the long haul. Companies such as Walmart (WMT), Cincinnati Financial (CINF), and Sonoco Products Co (SON) were among those that stood out from their peers based upon a few selection criteria, including dividend yield, payout ratio, and debt levels.

However, some investors will pick dividend stocks based upon one or two traits and ignore the rest. This is a recipe for disaster. In this article I’d like to point out a handful of companies that investors might want to avoid for now.

Yielding bad results

Kinder Morgan, Inc. (KMI) might look good on paper to some investors. After all, the Houston-based pipeline company pays out a $0.50 annual dividend and the stock yields 3.4%. This figure would meet my numerical criteria which is a dividend yield 25% greater than that offered on the 10-year Treasury note.

But there are other factors to consider. Looking under the hood the prospective investor might find that just a few months ago the company actually paid a much higher dividend and yielded 7.5%. Despite indications from management that all was well earlier last year, the turmoil in oil and a few bad moves forced Kinder to slash its quarterly payout by 75%. To add insult to injury its credit was downgraded by the ratings agencies. The stock took a tumble, now down about two-thirds from November 2014.

Some might argue that now might actually be a good time to pick up shares on the cheap. However, KMI could be a value trap right now and any company that cuts it dividend at the first sign of trouble should be avoided.

No Aristocrat Here

Another energy company that might appear to be one of the finer dividend stocks — but which investors should take a pass on — is ConocoPhillips (COP). For the first time in about 25 years the quarterly payout will be lower. ConocoPhillips likely won’t be joining the Dividend Aristocrats, a group of large companies that have raised dividends every year for at least 25 years in a row.

In the face of a revenue and earnings slump the company also is planning to cut capital spending by 17% and operating costs by 9% to deal with the crisis. CEO Ryan Lance stated that he is planning for oil prices to remain subdued for the foreseeable future.

The stock price has also suffered, down by 51% in the last twelve months. Investors might be better off looking for income elsewhere.

Aristocrat but for how Long?

One company that is currently on the Dividend Aristocrat list is another energy giant, Chevron (CVX). Management has insisted that the dividend is safe and likely to be increased. However, many companies have issued similar proclamations and investors got burned in the process. Any increase would have to take effect prior to the end of this year if executives want the stock to remain on the list. Chevron has increased dividend payouts every year since 1988.

Like many other energy companies, Chevron is being impacted by the drop in oil prices and just posted its first quarterly loss since 2002. The issues are putting immense pressure on the company’s short term plans. Project cancellations and staff reductions are in the works. Is the dividend next? There are certainly better dividend stocks for retirees to consider right now.

Conclusion

While there are some solid dividend stocks out there right now, retired investors should be careful before pulling the trigger. The oil patch is the primary area to avoid in the current environment.

Disclaimer: The author owns shares of Walmart and Chevron.


Article printed from InvestorPlace Media, https://investorplace.com/2016/02/3-dividend-stocks-avoid/.

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