7 Dividend Stocks to Leave out of Your Retirement Portfolio

Dividend Stocks
  • Investing in dividend stocks for retirement is excellent. However, you need to know what to look out for. Past performance and current dividend yields aren’t necessarily indicators of future performance!
  •  Union Pacific (UNP): Railroad traffic could be set for a multi-year decline as economic activity slows. Furthermore, UNP stock exhibits a stretched payout ratio.
  •  ARK Innovation (ARKK): Cathie Wood’s ARKK deploys a questionable strategy. Additionally, the ETF has a low skill ratio accompanied by high expenses.
  •  Brookfield Renewable Partners (BEP): Apart from being overhyped, BEP is trading at a premium and doesn’t cover its dividends well.
  •  Home Depot (HD): The stock’s dividend policy is stretched. Additionally, HD is faced with a cyclical downturn.
  •  United States Steel (X): X isn’t very shareholder-driven and could face a trying time during a contractionary economic period.
  •  International Business Machines (IBM): The Kyndryl spin-off won’t be enough to change its position in a crowded industry. In addition, IBM’s dividend distribution has peaked.
  •  Harley-Davidson (HOG): A tremendous slowdown in the company’s growth amid a rebranding phase has affected shareholder distribution.

Dividend stocks are great investment options if your objective is to invest for retirement. However, if you don’t choose them wisely, you could easily end up with a non-performing asset, in which your capital depreciation exceeded your dividend income. Moreover, dividend stocks can be cyclical in nature, meaning that their current yield isn’t always an indication of future yield.

The way I approached my screening process for this article was twofold. First off, I considered industry cyclicality for the medium term, as future cash flows need to be considered whenever forecasting dividend payouts. Secondly, I singled out stocks that I think are stretching their dividend payout ratios and, thus aren’t providing sustainable benefits to investors.

With all that being said, here are seven dividend stocks to avoid if you’re investing for retirement.

UNP Union Pacific $229.59
ARKK ARK Innovation $45.63
BEP Brookfield Renewable Partners $35.04
HD Home Depot $294.31
X United States Steel $27.22
IBM International Business Machines $136.02
HOG Harley-Davidson $38.35

Union Pacific Corporation (UNP)

United Pacific (UNP) switch on tracks near Kansas City.

Source: Michael Rosebrock / Shutterstock.com

Union Pacific’s (NYSE:UNP) stock is in trouble. The company’s solid, but we are likely headed for a multi-year slowdown in railway activity amid a slowing economy. As an analyst, your general top-down valuation procedure for stocks starts with GDP potential, and continues downward. Quantitative tightening will likely see GDP come in lower than anticipated for years to come, subsequently slowing down global trade.

We’re already seeing evidence of this as a recent report by the Association of American Railroads communicated that U.S. railroad traffic has slowed by 7.4% year-over-year. This is quite surprising considering we’ve been in a reopening. The systemic challenges are clearly reflected in Union Pacific stock, as it’s overvalued on a normalized basis. For instance, UNP stock is trading at a price-book premium of 67% and a price-sales surplus of 8%.

UNP exhibits a respectable forward dividend yield of 2.1%. However, the stock has poor safety ratios, with its payout ratio exceeding its 5-year average by 8.9%.

Stocks to Sell: ARK Innovation (ARKK)

A close-up of the Ark Invest homepage on a smartphone screen.

Source: Spyro the Dragon / Shutterstock.com

I’m just going to come out and say it the way it is. Catherine Wood’s ARK Innovation (NYSEARCA:ARKK) was a one-hit-wonder. The fund’s industrial revolution concept may align with economic theory, but it remains a folk tale to the stock market. Furthermore, Cathie Wood ignored all of modern ETF literature to construct an actively managed fund that has a flawed investment thesis.

ARKK’s information ratio of -1.7 conveys a lack of portfolio management skill, and its expense ratio of 0.75% exceeds that of the asset class median (0.29%). This just tells me that investors are paying a premium for below-par portfolio management.

ARK Innovation’s forward dividend yield of 1.9% isn’t sustainable, no matter how you slice it.

Brookfield Renewable Partners (BEP)

The Brookfield Renewable Partners (BEP) logo is displayed on a smartphone screen in front of a digital American flag background.

Source: IgorGolovniov / Shutterstock.com

Brookfield Renewable Partners (NYSE:BEP) is overly exposed to an industry that requires high re-investment rates at questionable returns. Although renewable energy companies are hot commodities, they’re cyclical and generally overhyped.

BEP missed its first-quarter earnings target by 17 cents per share amid rising input costs. Sure, the company has solid growth initiatives going on in Germany with its utility-scale solar development project and its modular carbon solutions in North America. However, the asset just isn’t good value for money.

Brookfield Renewable Partners is overvalued relative to the industry, with an enterprise value to earnings before interest and tax ratio of 43.4. Additionally, the asset’s 3.8% forward dividend yield is under threat, with its interest coverage ratio barely coping at 1.1.

Dividend Stocks: Home Depot (HD)

a Home Depot store is seen from the outside

Source: Cassiohabib / Shutterstock.com

Home Depot (NYSE:HD) has three significant headwinds. First off, demand for discretionary goods is in doubt. With inflation running high at 8.5%, we’re likely to see households cut back on non-necessary items.

Home Depot’s second issue is that it is severely overvalued, suggesting that investors have overbought the stock. HD stock is trading at a sector price-earnings premium of 66%, and its earnings per share growth is lagging its 5-year average by 3.3%.

Furthermore, Home Depot’s dividend safety ratios are poor. The stock’s forward yield of 2.6% is accompanied by an underwhelming free cash flow yield to dividend yield of 1.9%, implying that its future dividend payouts are in danger.

United States Steel Corporation (X)

Steel stocks: rods, bars and other forms of steel

Source: Shutterstock

Analyzing the current state of the ferrous metals market is relatively straightforward. We’ve got inactivity in China with the nation’s political policies causing unstable demand. Furthermore, a contractionary global economy could suppress the company’s growth rates, resulting in an ultimate contraction of its profit margins.

United States Steel (NYSE:X) missed its first-quarter revenue target by $30 million, yet the firm’s management claims that it’s likely to break records in its second quarter. The firm’s CEO, David Burritt, was quoted saying, “We also generated free cash flow of over $400 million which enables the opportunity to meaningfully increase our direct returns to stockholders in the second quarter.”

I don’t have much confidence in Burritt’s statement. I mean, the firm has a payout ratio of only 0.78%, suggesting that X isn’t very shareholder-driven.

International Business Machines (IBM)

The IBM 5160 is a version of the IBM PC with a built-in hard drive. Released on March 8, 1983. The 5100 series are knowns as one of the first home computers.

Source: Twin Design / Shutterstock.com

Many thought the Kyndryl spin-off would be IBM’s (NYSE:IBM) saving grace. However, the company continues to struggle as it has for many years. The cloud computing space has reached fever pitch, and crowdedness could cause IBM to spend excessively in the coming years, subsequently cutting its dividend.

IBM stock’s style factors are poorly aligned with negative operating cash flows (-9.1%) and an underwhelming earnings-per-share (7.1%) projected for the following year. Additionally, IBM exhibits shady dividend safety metrics. The stock’s forward dividend yield of 5.1% is accompanied by a payout ratio of 106%, a dividend coverage of only 1.5, and a $4 billion shortfall on its pension plan.

Harley-Davidson (HOG)

A close-up photograph of the tank to a Harley-Davidson motorcycle with raindrops on it.

Source: Alex Erofeenkov / Shutterstock.com

Harley (NYSE:HOG) needs to enter a massive rebranding period over the next decade, meaning that it probably won’t be able to distribute much of its residual to investors. The company’s motorcycles aren’t appealing to the newer generation, as conveyed by the 4.13% drawdown in the company’s 5-year normalized net income growth rate.

The firm has attempted to rebrand itself by spinning off its LiveWire electric motorcycle division. However, rebranding takes time, and we’ll likely see a decade of negative earnings growth for Harley.

Harley’s dividend yield of 1.7% is met with a -15.6% 5-year growth rate, spelling a gloom forecast for its investors.

On the date of publication, Steve Booyens did not hold any position (either directly or indirectly) 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.

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