The longer we go with interest rates at very low levels, the more surprised I am that the Capital, the Federal Reserve Building and the White House are not surrounded on a daily basis by hordes of angry savers and retirees.
I am also very glad I am not a broker dealing with retail customers, as the search for yield is turning into a desperate frenzy for income-producing products. Searching and reaching for high-yielding dividend stocks has been the source of the most losses I have witnessed in my career.
Yield hogs actually succeed in making option traders look good much of the time.
While I understand the frustration of inexperienced investors who are forced to turn to the equity markets for income, merely buying high-yield dividend stocks is not the path to success.
Investors must buy stocks with the best fundamentals, and most importantly, avoid those with poor fundamentals and financial conditions that can lead to capital losses far greater than the dividends collected.
To help achieve this, I suggest that investors only buy dividends stocks with high Piotroksi F-scores and avoid those with low scores, which indicate poor financial conditions and prospects right now.
The following are three high-yielding dividend stocks that you should avoid.
Dividend Stocks with Horrid Fundamentals: Outfront Media Inc (OUT)
Piotroksi F-Score: 4
Dividend Yield: 6.3%
Outfront Media Inc (OUT) is a stock that is being touted for income in the current environment, but investors should be wary.
This REIT, formerly known as CBS Outdoors, is in the advertising business. It owns billboards all across the United States and it also has long-term contracts for ads on mass transit vehicles like buses and trains in municipalities across the country.
The shares yield 6.3% and we see its products and property just about every time we leave the house, so at first glance, it seems like a reasonable dividend choice.
The problem is that business has not been very good, and it doesn’t look like it is going to get any better anytime soon. Earnings have declined over the last 5 years, and the always optimistic Wall Street crowd is only looking for about 3% a year earnings growth for the next several years.
If the economy slows further, that may be too optimistic. The company earns an F-score of just 4, so the shares are best avoided by yield-seeking investors right now.
Dividend Stocks with Horrid Fundamentals: HCP, Inc. (HCP)
Piotroksi F-Score: 3
Dividend Yield: 6.8%
HCP, Inc. (HCP) is a stock I hear mentioned as a solid dividend choice these days. It does, after all, have a great story behind it.
That story? The population is aging and using more healthcare services. Since HCP is a real estate investment trust that invests in properties serving the healthcare industry, including areas of healthcare such as senior housing, life science, medical office, hospital and skilled nursing facilities, it should be a good pick.
When you combine that great story along with its 6.8% yield, HCP is often just too much for inexperienced dividend investors to resist. However, a check of the F-score shows that the company only earns a score of 3, which tells us that its fundamentals and prospects are not that great right now.
HCP is best avoided until conditions improve and its F-score is upgraded to 5 or better.
Dividend Stocks with Horrid Fundamentals: Frontier Communications Corp (FTR)
Piotroksi F-Score: 4
Dividend Yield: 7.5%
Frontier Communications Corp (FTR) also has an almost irresistible combination going for it.
The company used to provide phone and internet services primarily in rural areas of the U.S., but recently struck a deal with Verizon Communications Inc. (VZ) to take over key markets in Texas, California and Florida. Its yield is a very attractive 7.5%, and best of all, the stock price is in the single digits.
A low-priced, high-yield stock with a cool story is the Holy Grail for inexperienced income investors, and a look at the F-score shows us that this stock should be avoided right now. The company earns just a 4, so the fundamentals and prospects are weak right now, and, as we have learned over the years, even low-priced stocks can go a lot lower.
It is going to take some time for the highly leveraged telecom company to integrate the Verizon purchase into its operations, and the stock is best avoided until they have proven they can do so successfully.
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.
