If you’re considering buying dividend stocks, you should always first consider the amount of risk involved in owning that particular investment compared to its potential return. This falls on the basic concept of risk vs reward. In addition to understanding the risk and reward of a single stock, you must also consider what the risk-free rate of return would be and compare that to potential income investments.
Currently, the risk-free rate of return, or the U.S. Treasury Bond Rates for a 10-year note, is at 1.77%. Since these rates are what investors consider as the risk-free rate, any financial investment with a similar rate of return should have a similar risk profile.
But while a stock may have a similar yield, the possible appreciation value of a stock can change its reward potential and make it worth the higher risk.
Unfortunately, not all dividend stocks are made equal, which is why I’m going to point out a few highly respected, once-proud dividend stocks. These loser dividend-payers offer little in the way of rewards to make up for their high risk. Don’t buy!
Dividend Stocks to Ditch: Clorox Co (CLX)
Dividend Yield: 2.4%
Despite its “clean” image and household name, The Clorox Company (CLX) may not be offering investors much value over the risk-free option during the next few years. CLX management recently noted that fiscal 2016 projections will be negatively impacted by 3% due to unfavorable currency exchange, and that sales growth will only be in the 3% to 4% range because of slowing international economies. Analyst, though, aren’t so optimistic with 2016 revenue projections indicating growth of just 0.8% and 2017 revenue growth of just 2.4%.
With shares currently trading at 25 times earnings and CLX only yielding 2.4%, if analysts are correct, Clorox shares are going to fall in the future. While a short-term fall doesn’t hurt a dividend stock’s long-term prospects, the fact remains that investors looking for safety and reliability need to consider how much risk Clorox garners today.
Despite CLX shares performing outstanding over the past 20 years, investors should remember that past performance doesn’t predict or guarantee future returns. A large part of CLX gaining over 1,000% since 1995 is the company’s global expansion. Now that CLX is sold all around the world, investors need to ask where the next growth engine for CLX is going to come from. Perhaps in the future it will again come from international markets, but with a global recession on the horizon, it may be a few years before this dividend stock gets another big boost.
Dividend Stocks to Ditch: Hormel Foods Corp (HRL)
Dividend Yield: 1.5%
Over the past year, shares of Hormel Foods (HRL) are up more than 47%. With that sort of performance from a company that owns more than 30 brands boasting the no. 1 or no. 2 market share in their respective categories, it’s hard to make a strong negative argument on why you shouldn’t buy the stock. Not to mention, Hormel’s CEO and Chair of the Board Jeffery Ettinger was recently voted One of the Best CEO’s by Barron’s.
But the recent stock move comes as HRL financials are improving following the recovery from negative business pressures after the avian influenza outbreak last year. The virus hit Hormel’s Wisconsin and Minnesota farms and caused operating profit to decline. In the most recent quarter, revenue fell 4.2% due to weak pork markets and low turkey harvests.
Regardless, the stock price is up during the past year, but so is HRL’s price-to-earnings, which are currently at 31 times trailing earnings and 26 times expected. That’s much higher than most dividend stocks. That P/E ratio is attached to a company analysts believe will see 2016 sales growth of only 2.6% and 2017 sales growth of just 4%, not the kind of sales figures one would expect a 30-plus P/E stock would have.
Furthermore, despite having increased its dividend payout by 314% over the last ten years, HRL’s current dividend yield is still a measly 56 cents or 1.47%, while it’s five-year average dividend yield is just 1.6%. (Not impressed.)
Despite its strong stock appreciation performance, The fact that an unforeseeable and essentially unpreventable bird flu epidemic, let alone a E.coli outbreak, can send the company into troubling times should be concerning for investors.
High outside business risk and low dividend yield, despite regularly increasing amount, should be enough to steer investors to safer options, especially when a risk-free Treasury bond is currently offering a higher yield.
Dividend Stocks to Ditch: Time Warner Inc (TWX)
Dividend Yield: 2.2%
The television industry is dying. There is no denying the fact that the rise of streaming video services has and will continue to hurt the old guard television companies. Nearly every study over the past few years points toward a shrinking cable subscription base.
Pacific Crest analyst estimated the top eight cable companies lost 463,000 subscribers in the second quarter of 2015. That drop compared to a subscriber base decline of only 141,000 the same quarter in 2014. Other estimates show pay TV subscriber growth fell 0.7% overall during second quarter 2015, compared to a 0.5% drop in Q1 2015. A longer-term chart of subscriber growth rates makes the picture of what’s happening to the industry very clear.
Click to Enlarge Back in November Time Warner (TWX) lowered its own earnings estimates for 2016 from $6 to $5.25 per share. While management claims this was due to higher spending and foreign exchange, the company also announced that channel subscriptions fell by 1% more than it had expected. That decline would “negatively affect ad revenue,” said Time Warner CFO Howard Averill.
If declining user growth rates in the coming years were all TWX had to worry about, investors would simply sit back and collect their 2.2% dividend yield. While TWX currently has a market capitalization of $58 billion, it has more than $23.7 billion in debt. So, if subscribers continue to fall and the business hits a road bump, the dividend may come under pressure.
With a shrinking user base and high debt, TWX’s 2.2% yield doesn’t justify the risk associated with owning the stock, especially when compared to the risk-free yield an investor can obtain from owning a 10-year Treasury note.
As of this writing, Matt Thalman does not own shares of any company mentioned above. Follow him on Twitter at @mthalman5513.