Dividend payments can be both a blessing and a curse for investors. On the positive side, dividends reward stockholders with profit sharing. And dividend payments can form an essential part of an investor’s income, particularly in retirement when people live on a fixed income.
However, extremely high dividends often are an indication of trouble at a company or with its stock. Companies in financial straits or whose share price is falling steeply will often use a high dividend to attract and retain shareholders. This is called a “dividend trap” and should be avoided. As is nearly always the case, it usually is if something seems too good to be true. And a high-yielding dividend is often a sign that a ship is taking on water. Here are three dangerous dividend stocks to avoid at all costs in June.
Icahn Enterprises (IEP)
We’ll start with the elephant in the room. That would be Icahn Enterprises (NASDAQ:IEP), the holding company of legendary investor Carl Icahn. The stock currently has the biggest dividend yield among companies listed on the S&P 500 index at 34%. Shareholders of IEP stock enjoy a quarterly dividend payment of $2 a share. The hefty dividend has attracted legions of mostly retail investors who take large positions to take advantage of the quarterly payouts.
However, IEP stock has plunged 55% this year after Icahn Enterprises was the subject of a scathing report by notorious short-seller Hindenburg Research. In its report, Hindenburg accused Icahn Enterprises of committing fraud and running a de facto Ponzi scheme that uses capital from new investors to make its quarterly dividend payments. Icahn appears to be fighting back and has refused to adjust the dividend as the stock has cratered recently. But now news comes that regulators are looking into the company. Not good.
Altria Group (MO)
While no other company can touch the sky-high dividend yield offered by Icahn Enterprises, cigarette maker Altria Group (NYSE:MO) still offers a chunky payout to stockholders each quarter. The parent company of Philip Morris currently pays a dividend that yields 8.40% or 94 cents a share every three months. While that’s a better yield than investors are likely to find nearly anywhere else, it can disguise that MO stock has been a chronic underperformer. Over the past five years, Altria Group’s share price has fallen 23%.
MO stock hit an all-time high back in 2017, and since then, it has declined 40%. The slump can be attributed to declining sales, difficulty creating new products, and ongoing litigation related to the health harms of tobacco and the company’s marketing practices. Consider that half of all American adults smoked tobacco in the 1940s and that only 12.5% of the population regularly used tobacco in 2021, and you get an idea of the strong headwinds facing Altria Group. The company spent $13 billion in 2018 to buy e-cigarette company Juul but has since written off that acquisition. Thus, it’s definitely one of the most dangerous dividend stocks to avoid.
The performance of PetMeds (NASDAQ:PETS) is even worse than Altria Group, an online pharmacy that dispenses medications primarily for cats and dogs. PETS stock boasts a dividend yield of nearly 8%, which equates to a quarterly payment to stockholders of 30 cents a share. The company is no doubt hoping that investors focus on the dividend and look past the fact that its share price has crumpled 62% in the last five years, including a 31% decline over the past year.
PETS stock has been sinking due to poor earnings and slowing demand for its pet medications. For its March quarter, PetMeds reported $62.4 million in revenue, down 5.5%. The company also posted a net loss of $5.1 million after announcing a profit of $6 million in the previous year. Executives at the company tried to put a positive spin on the earnings by pointing out that sales were up quarter-to-quarter. PetMeds has maintained its dividend, but analysts wonder how long that will last.
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.