Most Americans live in fear of outliving their retirement savings and having to turn to their kids for help. And hey, I don’t blame them. Apart from being scary, it’s humiliating, and no one wants to be a burden on their kids.
But even if you have a bountiful nest egg and modest spending habits, you can easily wreck your retirement by owning the wrong stocks. Lehman Brothers, Enron, Worldcom, General Motors Company (NYSE:GM). I could go on forever naming formerly “safe” retirement stocks that ended up blowing up. Investors who depended on these stocks to fund their retirements suddenly had holes in their portfolios that they had no way of filling.
And a company doesn’t necessarily have to go bankrupt to wreck your retirement.
Consider Kinder Morgan Inc (NYSE:KMI), a pipeline stock that was wildly popular with investors seeking yield. In late 2015, the company got overextended and had to cut its dividend by 75%. While the company is still alive and well — and actually growing — if you had needed that dividend to pay your retirement bills, you’d be up a creek without a paddle.
So today, we’re going to look at seven high-yield stocks that could potentially wreck your retirement.
All are common household names that are likely to be found in a retirement portfolio. And if you happen to own one or more of them, you might want to consider dumping them lest they wreck your retirement.
High-Yield Stocks That Could Wreck Your Retirement: IBM (IBM)
Dividend Yield: 3.2%
I have all the respect in the world for Warren Buffett. The man is a living legend. But I’d love to know what on earth he was thinking when he made International Business Machines Corp. (NYSE:IBM) one of the largest holdings in his portfolio.
It appears that the Oracle of Omaha, as astute an investor as he is, failed to take into consideration how the rise of the cloud would wreck IBM’s business. As ridiculous as this would have sounded even five years ago, I question IBM’s long-term viability at this point.
Amazon.com, Inc. (NASDAQ:AMZN) gets a lot of press for its disruption of retail commerce. But Amazon’s cloud computing platform — Amazon Web Services (AWS) — is having an equally disruptive effect on business computing services. Just look at IBM’s awful run: Its revenues have fallen for 19 consecutive quarters. In another week, we’ll find out if IBM can make it an even 20.
Stop and think about that. IBM’s revenues have been shrinking for nearly five years straight, and a lot its business is going to Amazon and cheaper cloud competitors.
Corporate purchasing managers back in the day used to say that “no one ever got fired for buying IBM.” Well, if you’re a portfolio manager, you probably ought to get fired for IBM. Yes, it yields a nice 3.2% … but it’s also highly likely to let you down if you’re depending on it to fund your retirement.
High-Yield Stocks That Could Wreck Your Retirement: Altria (MO)
Dividend Yield: 3.4%
It’s easy to see why Marlboro cigarette maker Altria Group Inc (NYSE:MO) has been a popular high-yield retirement stock since time immemorial. It’s a consumer staple that is largely immune to the ups and downs of the economic cycle. During recessions, smokers might actually light up more often due to the additional stress.
There is a big problem with depending on a stock like Altria to pay your bills in retirement, however: Cigarette use is in terminal decline across the world. American teenagers are more likely to use an illegal drug than to smoke a cigarette. The percentage of the population gets smaller every year.
But as bad as that might be, my biggest reason for steering clear of Altria is its price. It’s simply too expensive at current prices. The stock trades for 20 times next year’s earnings and yields just 3.4%.
For a company in terminal decline, that’s simply not high enough yield to warrant serious consideration.
High-Yield Stocks That Could Wreck Your Retirement: Philip Morris (PM)
Dividend Yield: 3.7%
I could say the same for former Altria international division, Philip Morris International Inc. (NYSE:PM).
Smoking rates, as a general rule, are higher outside of the United States. But they are lower than they used to be, and they are falling … quickly. Most countries have some level of socialized medicine, and treating smoking-related illness is expensive.
Among large European countries, Germany has the highest smoking rate at around 30% of the adult population, according to the World Health Organization. But even in Germany, smoking is in retreat due to stricter bans on where smokers can light up. And even China — the last great hope for the tobacco industry with an estimated 350 million smokers — is clamping down on smoking and is looking to implement a smoking ban in public places this year.
Meanwhile, Phillip Morris International is far from cheap, trading at 21 times forward earnings projections. Yes, it yields 3.7% — a relatively high yield in a broader market that yields only about 2%. But that’s not high enough given very real growth concerns.
I wouldn’t recommend PM for a long-term retirement portfolio.
High-Yield Stocks That Could Wreck Your Retirement: Verizon (VZ)
Dividend Yield: 4.7%
Up next is mobile phone, internet and paid TV provider Verizon Communications Inc. (NYSE:VZ).
Telecom stocks have been popular high-yield choices among retirees forever. The stable, recession-resistant businesses, near monopoly power and high dividend yields made them obvious choices.
But consumers have more flexibility to change providers than ever before, internet and mobile phone service are completely saturated in all developed countries, and, at the end of the day, the services being offered have long since been commoditized. Few consumers are willing to pay for “premium” mobile or internet service these days. Price is pretty much all that matters.
And paid TV? Well, it effectively priced itself out of competition. Cable TV inflation rivals that of medicine or college tuition at a time when American family incomes aren’t growing. It’s not surprising that nearly 2% of Americans cut the cord every year.
I don’t think VZ will be going out of business any time soon. And for now, Verizon’s 4.8% dividend would seem to be safe. But as a general rule, I wouldn’t want the safety of my retirement to hinge on a stock in an industry facing major disruption.
High-Yield Stocks That Could Wreck Your Retirement: Macy’s (M)
Dividend Yield: 5.2%
I’d recommend you dump beaten-down retailer Macy’s Inc (NYSE:M). With a 5%-plus dividend, Macy’s is the sort of stock that will make an income investor sit up and take notice. It helps that it also fetches an unassuming 10 times next year’s expected earnings.
I actually think Macy’s would make a decent trade. To me, it looks like the “buy Amazon / short traditional retail” trade has come close to running its course for now. I wouldn’t be surprised to see Amazon take a breather and Macy’s enjoy a nice rally sometime this year.
But I absolutely wouldn’t fall in love with Macy’s or expect it to regain its former glory. Traditional retail really does face unrelenting pressure from Amazon.com and other internet retailers. And unless Macy’s figures out a new business model in a hurry, that 5.2% dividend will likely get cut at some point in the next few years.
I’m not sure how all of this shakes out.
Traditional retail won’t disappear completely. If nothing else, brands will need to rent mall space to showcase their wares. But it will be a painful transition to get to that point, and there will be casualties along the way. I don’t expect Sears Holdings Corp (NASDAQ:SHLD) or J C Penney Company Inc (NYSE:JCP) to survive the next recession.
Macy’s probably won’t go out of business, but I still wouldn’t want my retirement to depend on it.
High-Yield Stocks That Could Wreck Your Retirement: Pitney Bowes (PBI)
Dividend Yield: 5.9%
Pitney Bowes Inc (NYSE:PBI) will get your attention with its nearly 6% dividend yield. But don’t be seduced. PBI is a company with a very uncertain future.
Remember: This is a company whose primary business is selling postage meters and related supplies.
I’m not exaggerating when I say I might literally go a month without checking my mail. All of my utility bills are sent and paid electronically. If it weren’t for the occasional birthday invitation that gets sent to my kids, I would actually physically remove my mailbox from my property, as all it seems to do is accumulate junk mail and jury summons for the previous resident.
I give credit to Pitney Bowes for being a survivor. It’s a miracle that email, the internet and mobile apps haven’t put it out of business yet. But despite the company’s herculean efforts, PBI’s revenues have dropped every year since 2008. Annual revenues today are at 2002 levels.
I know, I know. The 5.8% yield is attractive. But this is a company that has already cut its dividend in recent years. Do not depend on this company to get you through retirement.
High-Yield Stocks That Could Wreck Your Retirement: Mattel (MAT)
Dividend Yield: 6%
Iconic toymaker Mattel, Inc. (NASDAQ:MAT) is getting its butt kicked. I’d love to be more tactful here, but there’s really not much else to say. Its historic brands like Barbie aren’t growing like they used to, and rival Hasbro, Inc. (NASDAQ:HAS) is taking all the shelf space with its Disney, Star Wars and Marvel superhero toys and accessories.
Kids are fickle. I get that. My son changes favorite soccer teams more regularly than I change my socks. But Hasbro has had a long string of wins, and Mattel just hasn’t been able to keep up.
Could Mattel’s brands make a comeback? Sure. All it would take would be a successful cartoon or movie. And it’s entirely possible that Mattel will come out with the new “it” toy tomorrow. But we haven’t seen any indication of it yet, and now Hasbro has Disney’s marketing juggernaut behind it via the Disney and Star Wars movies and assorted spinoffs.
Mattel is a high-yield stock for now, but unless earnings pick up in a hurry, that dividend is unsustainable. It’s currently sitting at a payout ratio of 165% of profits.
Stay away from Mattel. It’s a stock with the potential to absolutely wreck your retirement.
Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas. As of this writing, he was long KMI.