Deciding which dividend stocks to sell can be difficult. Dividend stocks hold a special place in the hearts of investors. However, not all dividend stocks are created equal, and there are some that you’d be better off avoiding.
Though these dividend stocks to sell may offer the allure of consistent returns, the reality can sometimes be quite different.
A dividend is only as good as the underlying stock that’s paying it. The top dividend stocks to sell show warning signs of potential dividend cuts. These include a high payout ratio, declining earnings, high debt levels, and negative news or industry downturns.
For instance, if a company is paying out a substantial portion of its earnings as dividends, it is unlikely to be sustainable in the long term. Firms with high debt levels might need to cut dividends to pay down their debt. These are the risky dividend stocks that might lead to substandard returns.
Therefore, investors must beware of the dividend stocks cutting payouts. That said, let’s look at three dividend stocks to sell.
Cato Corp (CATO)
Cato Corp (NYSE:CATO) is a leading specialty retailer of women’s apparel, shoes, and accessories. Headquartered in Charlotte, NC, the company has been in business for over 65 years, operating through its two main segments in Retail and Credit.
The Retail segment sells women’s fashion items. The Credit segment offers credit card and credit authorization services.
A look at its financials suggests the firm struggles across both lines. Revenue and EBITDA growth on a year-over-year basis is at a deplorable negative 2.4% and 98.3%, respectively.
However, it yields an impressive 8.1%, but with a 5-year dividend growth rate at a negative 12.4%, the figure is far from tempting. The dividend yield of a particular stock does not consider the potential for growth in the dividend payment or the stock price in the future. Hence, it’s best to avoid CATO stock.
PetMed Express (PETS)
PetMed Express (NASDAQ:PETS) is one of the top players to watch in the burgeoning pet care industry, which sees over $124 billion spent annually on their furry friends by the American population.
As a leading national pet pharmacy, the firm seems poised to take a generous slice of this lucrative pie.
However, it’s not everything is as smooth sailing as it seems with the pet care giant. The industry’s incredible growth has attracted a sea of competitors, denting the firm’s market share.
In staying afloat, the company has effectively ramped up its advertising efforts to reel in new customers and keep existing ones hooked in the process. However, PetMed Express is in a dog-eat-dog situation, grappling with fierce competition and rising costs.
Moreover, with dwindling profitability, an incredibly high yield of 8%, and a payout ratio of 6,000%, it’s best to avoid this dividend trap.
Big Lots (BIG)
Big Lots (NYSE:BIG) is a popular retail business that effectively operates discount stores across the United States. It offers various merchandise at affordable rates catering to a budget-conscious consumer.
However, it has been navigating a tumultuous sea last year, grappling with a challenging consumer environment. Though the bulls are hanging on to the possibility of a turnaround in the latter half of 2023, it seems unlikely, given the current context.
Its ability to adapt and innovate in an ever-changing consumer landscape will foster its long-term success hinges. However, the path to recovery is fraught with challenges.
In terms of its dividend profile, it offers a yield of more than 19% which is alarming given its negative EBITDA, gross profit, and net income margins. Its five-year growth rate is at just 2.7%, making it a classic dividend trap.
On the date of publication, Muslim Farooque 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.