When something looks too good to be true, it probably is. How many times have you heard that saying?
The real question is, how many times was it accurate? Usually, there’s a trade-off between great rewards and great risks. And the companies that make up the seven dividend stocks that are too good to be true below are perfect of examples of that.
Some are in sectors that should be doing well. As a matter of fact, the sectors are doing well. Just not these stocks.
That takes me to the adage that a rising tide raises all boats. It doesn’t. It raises boats that don’t have holes in them and boats that the crew hasn’t tied too tight to the moorings. Both are management problems.
The problem isn’t with the dividend model itself. In fact, dividends are a must-have in my criteria for “AA-rated” stocks. It’s just that these companies don’t have the business model to properly back those dividends up.
Anyway, the stocks may look good in theory, but they’re not worth your time and patience; there are too many winners out there to pick from. Don’t waste your time here.
DCP Midstream (DCP)
DCP Midstream (NYSE:DCP) is an integrated natural gas and natural gas liquids (NGLs) company that does everything from exploration and production to storage and distribution.
Its dividend is a massive 13.7%. But usually, when the dividend is that high, it means the stock has been moving in the opposite direction. And that’s the case here.
DCP stock is off 36% in the past year. And it’s off nearly 8% in the past three months, as the winter season hits, which is high demand season.
The problem is, prices are low and exports that had been expected aren’t happening yet because of the global slowdown. Neither of these issues is looking any better moving forward.
What’s more, the dividend now has a greater risk of being cut, which would also send the stock price down even further.
AMC Entertainment (NYSE:AMC) is one of North America’s top movie theater companies.
While movies remain a big industry, the biggest challenge is the distribution channels have all shifted with the advent of streaming options like Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN) and now Disney (NYSE:DIS).
Not only do these platforms offer original content, but for the price of one movie ticket, you can watch more than a month worth of shows. And feature-length movies run in theaters for a couple of weeks, just to show up on streaming platforms. This is greatly suppressing the theatrical release.
Plus, newer movie theater companies are customizing their theaters for a more intimate and sophisticated experience. But AMC has far too many theaters to make upgrades an easy or quick project.
The stock is off 43% in the past year, so its 9% dividend isn’t making much of a dent. And its recent earnings released last week were not bullish. I see much better earnings trends out there.
Alliance Resource Partners
Alliance Resource Partners (NASDAQ:ARLP) is a coal company that focuses on providing coal to utilities and industrial plants.
Even with all the help of the government in Washington in recent years, coal is no longer king. And the trend, now that unconventional drilling methods have been able to access massive amounts of natural gas in the U.S., is not going to put it back on the throne anytime soon.
One of the major coal players went bankrupt a couple weeks ago. And analysts are downgrading ARLP stock, which means it’s not getting much attention on Wall Street, other than sells.
Now, it is delivering a massive 18.1% dividend. But the stock has also lost 40% over the past 12 months. It’s not exactly a winning bet.
And, with dividends like that, you can be pretty sure that dividend is going to be cut — and that will set off a deeper dive into the mine shaft.
This is more a story of how hubris felled the once mighty department store industry. For decades, these stores were the powerhouses of not just retail but every industry that was sold inside their stores — clothing, electronics, durable goods, you name it.
When these companies zigged, everyone zigged along with them. And not only did they set the trends, they set the pricing as well.
But those days are long gone, and department stores never saw it coming. And it’s big players like M that got caught in the toughest position since they sit on so much real estate.
Macy’s couldn’t slash prices because it would kill margins. It had to support all the stores and inventory. In the meantime, the business model just wasn’t working at the level I would expect from an investment. Its model had to be revamped but it was so big, it was hard to make changes quickly. Every day of delay put the company further behind new competitors.
The stock is off over 50% in the past year (and it’s off 62% in the past three years), so its 9.3% dividend doesn’t mean much. And holiday shopping may only delay the inevitable.
EQM Midstream Partners
EQM Midstream Partners (NYSE:EQM) should be loving today’s U.S. energy boom. Prices and production are rising, and all indications point to this being a good time for the shale energy business.
However, after the boom and bust in oil prices in 2014, exploration and production companies are playing it safe. They’re not pumping at capacity and they’re not drilling new wells at the pace the they used to.
They learned their lesson.
They’re growing, but at a reasonable and sustainable pace.
Couple that with the fact that there is a growing demand for alternative energy resources and midstream players aren’t seeing the kind of growth they expected.
EQM is focused on the Appalachian region, where most of its business is in natural gas. It spun off Equitrans Midstream Corporation (NYSE:ETRN) last year, so there are issues dealing with the spinoff, as well as low natural gas prices.
Plus, EQM has a pipeline project moving from Virginia to North Carolina that is likely to meet with resistance from locals.
The stock is off almost 50% in the past year, so even with its massive 18.7% dividend, you’re still not close to treading water. And the risks outweigh the reward by a long shot.
BGC Partners (BGCP)
BGC Partners (NASDAQ:BGCP) has been around in one form or another since 1945. It was part of the big trading firm Cantor Fitzgerald until it was spun off in 2004.
Up until last year, BGCP had two divisions. One ran its financial services arm, working with institutional traders and brokerages around the world offering trading systems and underwriting services for financial markets.
The other division focused on various forms of real estate investment, management and services. Over the years it acquired several larger commercial real estate firms around the world and built a very strong portfolio.
On Nov. 30, 2018, the real estate division was spun off as Newmark Group (NASDAQ:NMRK).
This past year has been about restructuring the company. And with a global recession underway, most of its foreign properties aren’t thriving right now. The same can be said of its financial services business.
This isn’t a gloom-and-doom story as much as it is an avoid-for-now story. The stock is off 19% in the past year and has a dividend around 10.3%. The thing is, even now, its trailing price-to-earnings ratio is a lofty 35.7.
There are much better choices on the real estate side and on the financial side, without dealing with all the exposure risk.
Colony Credit Real Estate
Colony Credit Real Estate (NYSE:CLNC) has not had a good year. And this is a year where U.S. real estate investment trusts (REITs) have been outpacing the broader market.
It’s off 35% in the past 12 months. Plus, not only was its third-quarter earnings announcement less than inspiring, but it split its portfolio into two divisions, slashed its book value and cut its dividend.
Now the dividend is still 10%, but there are plenty of REITs that are doing well right now. There’s no reason take on this stock in restructuring mode.
And That’s Just the Tip of the Iceberg
Outside of REITs, the demand for (good) dividend stocks is huge, and there’s a simple reason why.
These days, the global bond market is just going haywire. We’ve got falling and even negative yields overseas. But as investors retreat to U.S. Treasurys it’s causing bizarre effects here, too. Just look at what happened this summer, when the two-year Treasury actually began to yield MORE than the 10-year Treasury.
And even the 30-year Treasury can’t be relied upon for good yield anymore. In August, its yield dropped below 2% for the first time ever.
So — whether you’re managing big institutional cash, or your own portfolio — you’ll also want to look at the Money Magnets.
Not only did these stocks earn an “A” in my Portfolio Grader, thanks to strong buying pressure and great fundamentals …
The stocks also earn an “A” in my Dividend Grader. These stocks are able to pay great yields — and have the strong business model to back it up.
All in all, I’ve got 28 strong dividend growth stocks for you in Growth Investor … almost all of which yield more than the S&P 500. These stocks are poised to do well as we continue to see international capital flow to the U.S. markets. Click here to see how I found these stocks, and how you can get great performance out of YOUR portfolio — come what may.
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.