Dividend stocks are one of the best investments you can make. Companies that reward their shareholders with regular, growing payments can help to set you up for a comfortable retirement quickly.

Yet not all dividend stocks are made equal. Sometimes company financials have deteriorated to the point where it has no business paying a dividend, or at least not as large as it has been.

Even amongst Dividend Aristocrats and Dividend Kings, companies that have increased their payouts for 25 years and 50 years, respectively, will be forced to slash their dividends on occasion. Earlier this year 3M (NYSE:MMM) slashed its dividend in half after raising the payout for 64 consecutive years. Walgreens Boots Alliance (NASDAQ:WBA) started the year cutting its dividend in half after hiking its payout for almost 50 years.

That makes it imperative you jettison the following dividend stocks to sell from your portfolio. Their businesses are not up to the task of supporting their payout. Particularly for income investors and retirees, these are the first dividend stocks to sell in August.

Whirlpool (WHR)

Whirlpool (NYSE:WHR) used to be one of the best, most beloved appliance manufacturers but it has fallen far in quality and reputation. I’ll admit to a certain bias against Whirlpool stock after a horrendous experience with a new refrigerator (the compressor broke nine days after purchase) and the company’s customer service (there was none). But a dispassionate view of the business and its dividend leads to the same conclusion: this is a dividend stock to sell.

Sales tumbled 14% in the second quarter to just under $4 billion on a currency-adjusted basis while ongoing earnings collapsed 43% year-over-year to $2.39 per share. It no longer produces any free cash flow (FCF) and its use of cash worsened to $713 million from $587 million a year ago.

Whirlpool stock is down 24% year-to-date and is 34% lower over the last 12 months. The hefty dividend of $7 per share yields 7.5% annually. While the appliance maker’s earnings payout ratio of 80% is definitely a yellow flag, its FCF payout ratio, which is a better measure of a company’s ability to continue making the payout, exceeds 100%. Big red flag. With Whirlpool counting on the housing market to save it, even as it weakens considerably, the appliance maker is the first dividend stock to sell. 

Xerox (XRX)

Another prestige nameplate that is a shadow of its former self is Xerox (NYSE:XRX). The stock has been nearly cut in half in 2024 though it is down “only” 39% of the past year.

Last year was supposed to be a year of “reinvention” for the inventor of the photocopier. It seeks to transform itself into “a leading services-led, software-enabled technology solutions provider and deliver long-term, sustainable growth.” That’s not working out too well.

Second-quarter sales fell 10% on a currency-adjusted basis with adjusted net income plummeting 34% from last year to 29 cents per share. Year-to-date, revenue is down 16% while it has produced losses of 83 cents per share compared to a 2-cent profit last year.

While FCF grew by $27 million to $115 million in the current period, Xerox has a five-year and 10-year FCF compound annual growth rate (CAGR) of around negative 10%. So even though its FCF payout ratio is a low 25%, which should support the payout over time, dwindling access to cash profits puts it in the danger zone. It makes XRX a dividend stock to sell.

Seagate Technology (STX)

On the surface Seagate Technology (NYSE:STX) looks good. The stock of the solid-state hard drive (HDD) maker is up 10% this year, even after the big market selloff on Monday. Shares are also 41% higher over the past year. Sales bounced 14% in its fiscal fourth quarter as demand for hard disk drives was strong due to data center growth.

The need for HDDs in cloud storage situations allowed Seagate to report its first annual growth in two years. The need for power and capacity is pushing the HDD maker forward. Yet as a dividend stock, Seagate is ailing.

FCF production has declined precipitously over the past five- and 10-year periods while dividend growth is anemic. At a less than 2% CAGR over the past half-decade, Seagate shareholders are actually receiving less money from the payout than they were previously because of inflation.

Despite the minimal dividend growth, Seagate’s FCF payout ratio of 92% puts the dividend in the high-risk category. Because FCF is the money a company has left over after paying its bills to fund its dividend, buyback shares, acquire new businesses, or pay down debt, Seagate has precious little cash available.

Seagate carries almost $5.2 billion in long-term debt. While it didn’t buy back any stock, it paid out $585 million in dividends though it generated just $385 million in FCF. That makes STX a dividend stock to sell.

On the date of publication, Rich Duprey held a LONG position in MMM and WBA stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.