There are many misconceptions about dividend stocks. The conventional wisdom is that dividend stocks are safe investments that provide shareholders with a steady and reliable income stream. To that end, many investors assume that the higher the dividend yield, the better. Not so fast. Often, a high dividend yield is a sign of trouble.
Unusually high dividend yields can help cover up the poor performance of a stock. Many companies that offer extremely high dividend yields are often in financial straits and can fail. And investors should keep in mind that dividends are almost always paid out at the discretion of a company’s board of directors. They can be cut off at any time. This was the case recently with telecommunications company Lumen Technologies (NYSE:LUMN), which abruptly canceled its quarterly dividend yielding 15.85%.
With that in mind, here are three dividend stocks to sell and one to buy:
Dividend Stocks to Sell:
With interest rates on the march higher and the economy slowing, retail stocks have suffered this year. The department store chain Macy’s (NYSE:M) has been among them. So far in 2022, M stock has declined 25% to trade at $21 a share. Over the past 12 months, the stock has fallen 34%. Looking out five years, we see that the share price is up a tepid 1%.
While the stock pays a decent dividend yield of 3%, which is good for a quarterly payout of 16 cents a share, it needs to be more attractive to compensate for the dreadful performance of the stock. While the share price is likely to enjoy its annual holiday bump through December, any increase will likely be short-lived.
This is especially true as the Cincinnati, Ohio-based company faces rising competition in the retail sector, the prospect of an economic recession in 2023, and squeezed profit margins. Time to sell.
You might think that the world’s largest semiconductor chip manufacturer would be a good investment. You might also think that Intel’s (NASDAQ:INTC) quarterly dividend that yields a high 4.8% is just icing on the cake when it comes to this stock. But you’d be wrong.
Intel’s stock is fast becoming known as a value trap. Essentially it is a once high-flying stock that has continued to underperform and sink slowly lower over a sustained period of time. Consider that INTC stock is down 43% this year and 32% over the past five years. At $30 a share, the stock is trading today at the same level it was 25 years ago.
If anything, the high dividend yield, which equates to a quarterly payout of 37 cents per share, is used to attract and distract investors from the stock’s poor performance. Insult to injury, INTC stock just received a double downgrade from analysts at JPMorgan Chase (NYSE:JPM), who claim the company is rapidly losing market share to competitors. Not good.
Altria Group (MO)
Speaking of distracting dividends, how about the 8.5% yield offered by Altria Group (NYSE:MO), the Richmond, Virginia-based tobacco company? The maker of cigarettes and vape products currently pays shareholders 94 cents a share every three months. While attractive, the dividend obscures a dismal performance in the company’s stock over the long run.
This year, MO stock is down 8%, which isn’t bad compared to the 17% decline in the benchmark S&P 500 index. However, look out for five years, and Altria Group’s share price is down 34%. The stock is trading at just under $44 a share today at the same price it was nearly a decade ago.
The company continues to post disappointing earnings, and Juul Labs, the vaping company in which Altria has a 35% stake, appears to be on the verge of bankruptcy. Thus, this is one of the dividend stocks to sell now.
One Dividend Stock To Buy:
Now for a dividend stock worthy of investors’ capital. Consider oil giant Chevron (NYSE:CVX). Not only is the San Ramon, California-based company the second biggest U.S. energy company by market capitalization, but CVX stock also pays a handsome dividend that yields 3.05% or $1.42 per share each quarter. Earlier this year, the company raised its dividend by 6%.
In addition to the strong dividend yield, shareholders of CVX also benefit from a stock that has gained 56% this year and 63% over the past five years. And, even with the run-up in share price, Chevron’s stock continues to trade at just ten times forward earnings, which is below the average price-earnings ratio among S&P 500-listed stocks of 15.
Currently trading at $186 a share, CVX stock is near its 52-week high. But with energy prices expected to spike higher this winter, there’s no telling how far Chevron’s stock could run.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.