There’s a lot to be said about dividend stocks that’s positive. The companies they represent are shareholder friendly. They are usually issued by companies with a long-term view of the markets and growth in their sector. They offer income in a world bereft of decent traditional dividends.
But there’s also another side to these stocks. If they’re too generous with their dividends — usually done to attract investors — they run the risk of having to cut their dividends, and the market doesn’t take kindly to that.
Or, they can be in sectors where the companies have been organized to pay part of net profits as dividends for tax purposes — like real estate investment trusts (REITs) or limited partnerships (LPs). These are companies specialized in particular sectors, and those sectors have cycles that may endanger dividends.
The seven dividend stocks in danger here are in their current predicaments for some of these reasons, and for some unique to their industries. Either way, steer clear for now.
- Boston Properties (NYSE:BXP)
- Edison International (NYSE:EIX)
- Energy Transfer LP (NYSE:ET)
- L3Harris Technologies (NYSE:LHX)
- Raytheon (NYSE:RTN)
- AT&T (T)
- Realty Income Corp (NYSE:O)
Dividend Stocks: Boston Properties (BXP)
As the largest builder and owner of commercial properties in Los Angeles, Boston, San Francisco, Washington, DC, and New York, a year of pandemic has done a number on this REIT’s stock.
There are some REITs that are doing very well now, like those in the data-center market. But like the decline of shopping mall REITs that began a few years ago, remote working is going to take a toll on Boston Properties long after the pandemic eases its grip.
With many dividend stocks, there’s an inverse relationship between the price of the stock and the dividend. For BXP, that relationship is apparent.
The stock has lost 34% in the past 12 months, and it’s delivering a 4.25% dividend. That may look tempting, but a dividend that high is in danger of being cut. And once it’s cut the stock will dive even further. Wait for the dust to settle here.
Edison International (EIX)
Usually utilities are solid investments because they offer essential services, like electricity, to users. And as essential services companies, state governments allow them nearly monopoly status.
But they have to work hand-in-glove with state and federal regulators and come to an agreement on how much growth they add into their budgets every year, which keeps prices stable.
This only works if regulators and the utilities are on the same page. EIX is the parent of SCE, which was formerly known as Southern California Edison, the key utility for Southern California. The challenge is that renewable energy that’s generated off the grid as well as new mandates from the state are making it hard for EIX.
And the pandemic has only hastened that along since its revenue has been hit by lower use in office buildings. The other problem is that the stock is down 29% in the past 12 months, and EIX has a 4.8% dividend and an outrageous price-to-earnings (P/E) ratio of 57.
Energy Transfer LP (ET)
Midstream energy companies are basically pipeline companies. They take the oil or natural gas from the fields and ship them to storage facilities or refineries or another pipeline.
They also make their money on the volume of product that flows through the pipelines. It matters little to them if oil prices are $60 a barrel or $16. It’s all about demand. Usually midstream companies are the first to signal a recovery in the oil patch.
But they’re a cyclical and volatile bunch. And right now, the trend is down. Investors are moving money to sexy renewables and oil, which, while the price is high, isn’t showing a significant increase in demand. The price of oil more reflects a weaker dollar and the fact that more dollars are needed to buy the same amount of oil.
The stock is down 37% in the past 12 months, and its 9% dividend, while attractive, isn’t that stable. When it comes to LPs, they’re very tempting but dangerous dividend stocks.
L3Harris Technologies (LHX)
In 2019, two of America’s largest and most influential communications companies merged to form a major player in the defense community, as well as the broader aerospace and telecom infrastructure space.
Pretty much anything that flies has some form of L3Harris Technologies equipment on in it. And many troops in remote areas rely on LHX communications infrastructure and equipment.
The trouble is that defense spending has become a lower priority. The pandemic has become a bigger threat than our rivals, and economic recovery has stolen the front pages from national rivalries. And LHX has fallen victim to that as many defense contractors have.
It’s certainly not that LHX is doomed. Far from it. But it’s not the time to step in, even for its recently announced dividend boost. There may be more trouble before things stabilize, and there are better opportunities.
The stock has lost 15% in the past 12 months and has a 2.2% dividend, but is still richly valued with a current P/E of 36. It’s never a classic dividend stock, and its growth is now hamstrung.
The same that applies to LHX applies to RTX. But you also need to factor in the fact that one of its key rivals just bought a leading rocket-engine company, and one of Raytheon’s core businesses is missiles and rockets.
Many of the large defense contractors have specialized in specific industries over the years. While there is still some competition for various big contracts among them, they each have core competencies that make up a majority of their business. When that balance among these leaders changes, it disrupts the players seen at a disadvantage. That’s where RTX is today.
The stock is down 23% in the past 12 months, and it has a 2.6% dividend. But there are better places to put your money to work right now.
The old Ma Bell has been around in one form or anther since 1877. In the 1980s, the company was split up into “Baby Bells” after federal antitrust investigations. T stock is the core of that original Ma Bell and one of its key rivals, formerly known as Bell Atlantic.
While AT&T has been adept at managing its influence since then, it has also found itself besieged by competitors that it never expected would rise to its level. The company has kept a core corporate culture of gradualism in a market that’s used to dynamism.
It has made attempts at joining the streaming and content race but has stumbled as much as it’s succeeded. Its last big successful play was the mobile market, but it acted like it was first among equals and has lost out to more customer-focused and nimble rivals. And it remains challenged on the content side as well.
What all this ultimately means is lower subscriber numbers. And during the pandemic, higher rates of defaults.
But it has a $210 billion market capitalization, so it’s not disappearing, which makes its 7.1% dividend tempting. However, the stock has lost 24% in the past 12 months, so that dividend hardly makes for good performance.
Realty Income Corp (O)
When a REIT’s tagline is “The Monthly Dividend Company,” you know the audience it’s focused on.
Realty Income is in the freestanding single-tenant commercial real estate sector. It operates under what’s called a triple net lease agreement, which means the tenant is responsible for build out, upkeep and taxes on the property, and the company gets rent. This is a great model in good times, and Realty Income is one of the biggest REITs in the business because of it.
The trouble is, out of its top-10 portfolio holdings, two are movie theater chains and two are fitness clubs. These are two of the worst-hit sectors during the pandemic. And the jury is still out on if they’ll recover. Yet Realty Income is still stuck with leases on these properties.
For a company like this, this is a problem, but it’s not a fatal problem. However, given the fact that the stock is down 25% in the past 12 months, delivers a 4.6% dividend and trades at an eye-watering P/E of 52, there are certainly better dividend stocks out there.
On the date of publication, Louis Navellier has no positions in the stocks in this article. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article.
The InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
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.