In certain circumstances, high-yield dividend stocks can be great opportunities. However, often, they are well within the “stocks to avoid” category. Mainly, because of their high risk of being so-called “dividend traps.”
A stock that is falling because of either a dividend cut, or the growing likelihood of a dividend cut. This creates a double-whammy of decreased yields, alongside unrealized capital losses from the share price declines.
Loading up on too many of these names is one of the one of the most common dividend investing mistakes, yet at the same time it is one that is one of the most avoidable.
Steering clear of companies facing large headwinds, that in addition have unsustainable dividend policies, or even dividend payout policies dependent on fiscal results (like a variable dividend based on earnings).
These and other red flags are apparent with these seven dividend-paying stocks to avoid. Instead of producing strong returns thanks to their high yields, they may be more likely to be a drag on overall performance.
|BDN||Brandywine Realty Trust||$4.04|
|MPW||Medical Properties Trust||$8.15|
Brandywine Realty Trust (BDN)
Brandywine Realty Trust (NYSE:BDN) is a real estate investment trust (or REIT) that owns a portfolio of office properties. At current prices, BDN trades at a low valuation (based on its price/funds from operations, or P/FFO ratio, commonly used when valuing REITs).
Today, BDN stock trades at a P/FFO ratio of just 3.9, while comparable names trade at high-single digits P/FFO ratios. Alongside this, BDN also sports a super-high forward dividend yield (19.1%). However, Brandywine Realty Trust trades at such a deeply-discounted price for a reason.
Between rising interest rates, rising vacancy rates because of hybrid/remote working, there’s much uncertainty surrounding BDN’s future performance. This may mean its high dividend payout is unsustainable. On the most recent conference call, management discussed it may consider dividend cuts in the future, even if it remains able to sustain the current rate of payout.
Cal-Maine Foods (CALM)
Last year, Cal-Maine Foods (NASDAQ:CALM) became popular among investors looking to capitalize on the big jump in egg prices. Investors who got in early reaped the benefit of share price appreciation and high dividends.
However, investors who have bought CALM stock more recently have seen little in the way of price appreciation. Although the company has continued making big payouts, giving the stock a trailing twelve month (or TTM) yield of 5.64%, don’t assume that this high-yield will last.
Analyst forecasts call for CALM’s earnings to drop by more than 71% in the coming fiscal year (ending May 2024).
Besides pushing cheap CALM to a higher earnings multiple (from 3.3 to 11.6), this will also affect future dividend payouts, as Cal-Maine has a variable dividend policy. With this factor pointing to a further correction for CALM, consider it one of the bad dividend stocks.
Fat Brands (FAT)
Fat Brands (NASDAQ:FAT) is a name I’ve discussed recently as being one of the overvalued dividend stocks to avoid. The stock may offer investors a juicy dividend yield of 9.16%, but this restaurant franchising company is currently reporting negative cash flow, suggesting its current payout isn’t sustainable.
This alone makes FAT stock one of the bad dividend stocks, yet there are other factors that should scare you away. Mainly, the red flag surrounding this company’s former CEO (who still controls the company).
In recent months, Andy Weiderhorn has been the target of a federal investigation for a multitude of alleged white collar crimes. While Weiderhorn claims he is stepping down to “eliminate the distraction” caused by this investigation, this controversy could continue to weigh on shares.
There’s little indication that Fat Brands’ operating performance will soon improve, suggesting a dividend cut in the near future.
IBM’s (NYSE:IBM) high forward dividend yield (5.25%) isn’t the sole factor that makes it appealing.
The venerable tech giant has also pivoted into areas such as hybrid cloud services. “Big Blue” may also stand to benefit from the emerging AI mega-trend.
A potential growth resurgence from hybrid cloud and AI would likely push it to a higher earnings multiple (currently 13.3). Yet despite this promise, it may be best to avoid IBM stock, as dividend trap risk runs high. Recent results have been mixed and could continue to elicit a lukewarm reaction by investors.
Beyond current headwinds, it’s not set in stone that IBM will continue to report modest increases in revenue and earnings, just because of its move into hybrid cloud and AI.
The resultant disappointment may result in further lackluster performance of this stock, which has fallen by nearly a third over the past decade.
3M (NYSE:MMM) is another name I’ve recently argued is one of the top dividend stocks to avoid. The industrial conglomerate may be a “dividend king,” with well over 50 consecutive years (64 to be exact) of dividend growth.
Modest earnings growth is more than sufficient to enable 3M to continue raising its payout.
However, while its 5.74% yield may be safe, further declines may be in store for MMM stock. This is due to one factor: 3M’s massive legal liabilities. The company faces a plethora of litigation related to its past manufacture of PFAS chemicals and military ear plugs.
While some may argue the stock’s poor performance in recent years accounts for these risks, as uncertainty about these liabilities (which could top $100 billion for the earplugs alone) persists. With this in mind, steer clear, as 3M remains of the major dividend traps.
Medical Properties Trust (MPW)
BDN isn’t the only REIT among the bad dividend stocks right now. Medical Properties Trust (NYSE:MPW), which owns a portfolio of net-leased hospital facilities, is another REIT with strong dividend trap vibes. MPW has tumbled by more than 59% in the past year.
As InvestorPlace’s Chris Lau recently discussed, short-sellers have been making big bets against MPW stock, on the view that the REIT’s debt issues will result in it selling assets at discounted prices.
This in turn will likely result in Medical Properties Trust needing to slash or suspend its 29 cent per share quarterly dividend.
Although one can argue that a dividend cut is priced-in, given MPW now has a forward yield of nearly 14%.
However, it’s also possible that the yield-hunters still holding it today could bail en-masse, if a cut/suspension becomes official. Put simply, MPW stock is not a contrarian buy quite yet.
With price declines far outweighing a high single-digit dividend yield (currently 6.09%), AT&T (NYSE:T) has long been one of the dividend stocks to avoid. However, with the telecom giant’s recent post-earnings plunge, analysts and commentators suggest that now is a great time to enter a position.
Bulls such as JP Morgan’s Philip Cusick argue that T stock has the potential to make a gradual rebound, and that risk/return has again become highly favorable. Yet while I agree that a “dead cat bounce” is very possible in the near-term, long-term prospects for “Ma Bell” are still murky.
Middling revenue and earnings growth could keep it stuck at or near present levels. As a Seeking Alpha commentator has argued, AT&T isn’t out of the woods when it comes to its debt problem. This factor could also continue to be a drag on total returns.
On the date of publication, Thomas Niel did not hold (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.