While passive income typically represents a solid goal for most investors, the below doomed dividend stocks to avoid confirm that there’s no such thing as a risk-free sector. It’s like buying a used car. In arguably most circumstances, going the secondhand route is smart because it saves you money. However, you must do your homework.
For example, many people often make the mistake of buying a really cheap Maserati GranTurismo. Brand new, these highly desired Italian vehicles can run a price tag well into six-digit territory. However, they depreciate badly, so the uneducated buyer will jump at a $20,000 GranTurismo. That’s just like buying high risk dividend stocks featuring 20%-plus yields. What the overeager buyer doesn’t understand is that Italian cars generally are built for looks, not reliability. With unstable dividend stocks, the high yield often entices the unsuspecting rookie investor. But just like you wouldn’t buy a sports car that’s too cheap, you shouldn’t jump into overly generous passive income providers.
There’s a reason why the yield is so high and you don’t want to find out with your own money. With that, below are the dividend stocks destined for disaster.
Great Elm Capital (GECC)
Headquartered in Waltham, Massachusetts, Great Elm Capital (NASDAQ:GECC) is an externally managed, specialty finance company focused on investing in debt instruments of middle market companies. It’s structured as a business development company. Under normal economic circumstances, BDCs may offer intriguing investment ideas. However, under the current market ambiguity, GECC is likelier to rank among doomed dividend stocks to avoid.
Since the start of the year, GECC only lost about 8%, which isn’t too bad considering the circumstances. However, in the past one-year period, shares fell nearly 36%. Over the past five years, we’re now talking about a loss of approximately 86%. Just by these terrible stats alone, GECC should raise suspicion as one of the dividend stocks destined for disaster.
Because Great Elm carries a forward yield of 17.74%, there’s a risk that it might attract unsuspecting investors. Don’t let that be you. With the company suffering from a deeply negative trailing-year net margin along with a weak, debt-laden balance sheet, you’re better off avoiding this dividend trap.
Icahn Enterprises (IEP)
If you’ve been following business news even loosely this year, you’ll probably be aware of Icahn Enterprises (NASDAQ:IEP). The embattled conglomerate – founded by activist investor Carl Icahn – became the subject of brutal expose by Hindenburg Research. In short (uh, no pun intended), Hindenburg blasted the company for overvaluing its holdings.
Fundamentally, I hate to say it but IEP may be one of the doomed dividend stocks to avoid. Frankly, it’s giving off those 20K Maserati GranTurismo vibes. Interestingly, Hindenburg also accused Icahn Enterprises of relying on a “Ponzi-like” structure to pay its dividends.
Right now, IEP features a forward yield of 24.39%. For context, the financial sector’s average yield sits at 3.18%. I don’t see how this is sustainable, raising suspicions about IEP ranking among high risk dividend stocks.
Since the start of the year, IEP suffered a loss of more than 36% of equity value. Given that shares are dangling in no-man’s-land without long-term horizontal support, I’m fearful of more downside ahead. It’s just better to stay away.
Cohen & Company (COHN)
A financial services company specializing in fixed income markets, Cohen & Company (NYSEAMERICAN:COHN) presently sits in serious danger of complete collapse. Just in the past 30 days, COHN gave up more than 12% of equity value. Since the beginning of this year, shares suffered a halving (and I’m not talking about the cryptocurrency kind).
Even worse, over the past one-year period, COHN gave up just under 63% of value. It’s easily one of the doomed dividend stocks to avoid because the business is clearly crumbling. Now, the latest print has Cohen carrying a forward yield of 24.39%.
At that point, we’re not talking about a 20K Maserati GranTurismo. Rather, it’s a 5K GranTurismo. At that point, even the least-educated car buyer would have to know something’s up. It’s the same thing with COHN. I’m sorry but it’s one of the unstable dividend stocks to steer away from.
If you need extra warnings, Cohen’s Altman Z-Score of 0.38 indicates a distressed enterprise. Also, investment data aggregator Gurufocus declares COHN a possible value trap.
On the date of publication, Josh Enomoto 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.
