Dividend stocks are a great way for investors to create passive income within their portfolios. Over the past few years, high-yield dividend stocks have been a favorite among traders who have been looking for ways to beat interest rates with relatively safe investments.
While it’s true that stocks offering a high yield can be a great place to store your savings, not all dividend stocks are created equal.
There’s more to investing in dividend stocks than just evaluating their yield. Many companies with high-yield dividends are paying them out in an unsustainable way. Others are paying out large dividends to keep investors interested, but their business is doing poorly.
This is the case for companies like Frontier Communications Corp (NASDAQ:FTR), Occidental Petroleum Corporation (NYSE:OXY), Mattel, Inc. (NASDAQ:MAT) and Staples, Inc. (NASDAQ:SPLS). While all four pay out some of the highest yielding dividends on Wall Street, their dividend payments are unreliable.
High-Yield Dividend Stocks to Avoid: Frontier Communications (FTR)
Dividend Yield: 17%
Telecommunications company Frontier Communications has a dividend yield of about 17%. That’s impressive for any industry and might sound like an enticing reason to invest.
However, upon closer inspection it’s clear that FTR is unlikely to continue paying out such a hefty dividend because the company is already on thin ice financially. Frontier reported a net loss in its most recent earnings report and the company has been struggling to hold on to subscribers.
In an industry that is already heavily under siege, FTR offers very little upside. The company’s impressive dividend yield doesn’t mean much when you consider that the firm’s share price has been steadily declining for the past two years.
Investors would be wise to avoid FTR and instead look at some of the firm’s peers, like AT&T Inc. (NYSE:T), which also offers an attractive dividend.
High-Yield Dividend Stocks to Avoid: Occidental Petroleum (OXY)
Dividend Yield: 4.7%
The oil and gas sector has taken a beating over the past few years as oversupply and falling prices weighed on companies’ bottom lines. Over the past year the oil price environment has improved substantially, sending shares of producers and refiners higher. However, exploration and production company Occidental Petroleum missed out on that rally and shares of OXY have fallen nearly 10% over the past six months.
OXY investors enjoy a 4.7% dividend yield, but the good news ends there. Like Frontier, OXY also reported a net loss and the firm is struggling under declining sales and sinking margins, making it a worrisome investment.
Investors would be better off buying some of OXY’s better-quality peers like Total SA (ADR) (NYSE:TOT).
High-Yield Dividend Stocks to Avoid: Mattel (MAT)
Dividend Yield: 6%
Iconic toymaker Mattel has been an income investor favorite in years past, but the company’s struggle to remain relevant makes it a poor choice at the present. Mattel’s 6% dividend yield may sound juicy, but that figure is inflated because the firm’s share price has slid almost 20% over the past six months.
Not only that, but MAT is unlikely to continue paying such a lofty dividend payment much longer, as the firm’s payout ratio is well above 100% at 165%. That means MAT is spending more on dividend payments than the company is generating in free cash flow. In short, it’s unsustainable.
Perhaps these issues wouldn’t be such a deal breaker if MAT was about to make a comeback, but the firm’s holiday sales figures suggest that Mattel’s turnaround plans haven’t been the life raft that the company needed. Barbie sales were down 2% and the firm’s margins declined significantly due in large part to discounting.
High-Yield Dividend Stocks to Avoid: Staples
Dividend Yield: 5.5%
Office supply chain Staples is another company that offers what appears to be a great dividend yield at 5.5%. However, like most of the other companies on this list, SPLS is unlikely to continue paying out such a high dividend yield because the company is struggling to keep its head above water.
Like many other retailers, SPLS has fallen victim to the boom in online shopping and the company has been slow to catch up with changing consumer preferences. The firm’s fourth-quarter results showed that profit had fallen 4%, and the company is planning to reduce its store footprint by an additional 70 stores in the coming year.
While CEO Shira Goodman says the firm is on track for a turnaround, investors would be wise to avoid SPLS stock until there is some clear evidence that things are actually picking up.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.