Investors love high-yield dividend stocks with good reason. Dividend investments provide a strong income stream and can help investors remain calm in a volatile market. However, there are some dividend trap stocks out there as not all are created equal. After all, a dividend generally comes out of a company’s earnings and cash flows. If earnings and cash flows decline, the safety of the dividend must be called into question.
Given the current economic storm, there is a particularly high level of risk out there right now. Surging inflation and interest rates combined with a slumping real estate market have created a perfect storm for real estate investment trusts (REITs) in particular. Some dividends are likely to be slashed in coming months and years.
Make sure your portfolio is clear of these three dividend stocks to avoid in 2023.
Arbor Realty Trust (ABR)
Arbor Realty Trust (NYSE:ABR) is a REIT focused primarily on multi-family housing backed bridge loans. The company is focused on the southern United States, with Texas, Florida and Georgia being their largest markets.
What’s the matter with Arbor? Bridge loans are inherently quite risky, as they serve as a sort of intermediate financing for property owners. A buyer will get a bridge loan and then try to seek longer-term financing at a lower interest rate to pay off the bridge loan. In normal times, that’s fine. However, when property prices start to decline and banks are scared to make new loans, it may become difficult for borrowers to refinance their bridge loans and pay Arbor on time.
Additionally, short sellers have raised concerns about Arbor’s management team. NINGI Research published a blistering report suggesting massive downside in ABR stock based on purportedly bad mobile home loans, understated off-balance sheet liabilities and a variety of other concerns. The well-known research firm Hedgeye also labeled Arbor’s corporate governance as “atrocious” in a recent tweet.
On paper, ABR stock is offering a 14% dividend yield. Yet, even with that huge yield and the decline in Arbor’s share price, short sellers aren’t going anywhere; short interest remains in the double digits as a percentage of float. All this speaks to a dividend at great risk if and when the multifamily housing market sinks.
Paramount Group (PGRE)
Paramount Group (NYSE:PGRE) is an office REIT focused on New York City and San Francisco. The causes for alarm should jump out right from the description.
Office properties have been in trouble in most parts of the country thanks to remote work. Many businesses simply aren’t returning to five days a week in the office, meaning demand for space is down. The effect might not be catastrophic overnight, but in a leveraged industry like real estate, even marginal declines in profitability can have a massive impact on cash flows and thus the dividend.
Making matters worse, Paramount has a high degree of exposure to the ailing banking industry. In March, one of its tenants, Silicon Valley Bank (SVB), went bust. Paramount had just increased the size of its leasing contract with the failed bank last year, making this a bitter blow.
And then the hammer fell last week with First Republic Bancorp’s (NASDAQ:FRBK) collapse. First Republic was, worryingly enough, Paramount’s single largest tenant. It remains unclear what will happen to these office spaces now that SVB and First Republic have failed. However, it speaks to the deep and structural problems facing office REITs in general and Paramount Group in particular.
Simon Property Group (SPG)
Simon Property Group (NYSE:SPG) is one of America’s leading mall operators. The company has been in business for decades and has had tremendous returns since its IPO.
However, the future is unlikely to be nearly as bright as the past. That’s because Simon is a mall company. And shopping malls simply don’t hold the same appeal in 2023 as they once did. The rise of e-commerce and direct-to-consumer retail has gotten rid of much of the need for malls. Brands no longer need huge stores in every city to show their wares. And consumers can find far more selection online than on a shelf.
Simon has taken steps to try to address this. It has invested heavily in outlets, which may hold more lasting appeal than enclosed malls. It has also launched international shopping centers, hoping to diversify away from the U.S. mall market. Simon is also investing heavily in redeveloping its older malls, spending $500 million last year alone to remodel and refurbish properties.
This is all well and good, but Simon is fighting an uphill climb. There remain tons of aging department stores which will likely become obsolete over the next decade. Redeveloping these large vacant mall spaces into restaurants, entertainment, gyms or other purposes will cost countless millions.
Simon posted a mere 3% revenue growth last year, even amid a booming consumer shopping environment and high inflation. As the economy seemingly heads toward recession, Simon’s revenues and earnings are likely to decline. That will put pressure on SPG’s stock price and dividend.
On the date of publication, Ian Bezek 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.
