Don’t be fooled by high-yielding dividend stocks.
Often, dividends are used to mask problems at a company in the same way that air fresheners are used to cover up putrid smells. Shareholders force poor performing companies, whose stock is tanking, to provide a high yielding dividend to attract and keep them.
Without it, the share price would decline further. We call this a “dividend value trap” and can lead to long-term pain for unsuspecting investors.
If anything, investors should be skeptical when they see a dividend stock that is paying an unusually high dividend to shareholders.
Do your homework and look for poor performance and analyst downgrades of a stock that is offering an exceptionally high dividend payout.
Here are three dividend stocks to sell before they get downgraded by analysts and fall further.
Department store chain Macy’s (NYSE:M) offers an attractive dividend that yields 3.73% or 17 cents per share each quarter. However, this dividend stock doesn’t make up for the awful performance.
In the last 12 months, Macy’s stock has declined 30%. That includes a 12% decline so far this year. Looking out five years, the stock is down 40%. Gordon Haskett Research Advisors recently downgraded this stock, noting foot traffic in its department stores continues to slow. More downgrades could be coming.
The company recently announced that CEO Jeff Gennette will retire in February 2024 after 40 years at the retailer.
Perhaps new leadership can breathe some life into Macy’s, which faces a slew of problems that include slowing consumer spending and increasing competition from online retailers.
The department store chain reported mixed results for the fourth quarter of 2022. While it beat Wall Street expectations, the company’s net income was down 32% from a year earlier and its revenue declined 5%. Macy’s also provided muted forward guidance.
Altria Group (MO)
The dividend yield of 8.35% offered by tobacco company Altria Group (NYSE:MO) is truly impressive. If only its stock’s performance were equally impressive it wouldn’t be among the dividend stocks to sell.
Sadly though, MO stock continues to be a real laggard, trading 21% lower than where it was five years ago. In the past 12 months, the share price has slumped 18%. Even a quarterly dividend payment of 94 cents a share can’t make up for the dreadful performance of Altria’s stock.
The dividend attracts investors to a cigarette company. It also helps mask a large amount of debt Altria has taken on in recent years as it tries to grow into new areas.
Since 2018, the company has spent $12.8 billion for a 35% stake in vaping company Juul, $1.8 billion for a 45% stake in marijuana company Cronos Group (NASDAQ:CRON), and $2.75 billion on vape manufacturer Njoy Holdings.
Sadly, Altria has had to write off its Juul investment and halted further investment in Cronos because of problems in the legalized cannabis market.
Newell Brands (NWL)
Storage products company Newell Brands (NASDAQ:NWL) is one of those classic high-yielding dividend stocks that is a horrible investment.
NWL stock currently offers shareholders a dividend yield of 7.41%, which equates to a quarterly payout of 23 cents per share. While the dividend might seem enticing, the stock has been a complete bust.
Newell Brands’ share price is down 8% this year, has declined 45% over the past 12 months, and has plunged 53% through five years. The stock was downgraded by Barclays (NYSE:BCS) over profitability concerns.
Newell Brands is probably best known for its Rubbermaid storage and trash containers, most recently forecast a loss for this year’s first quarter.
The company announced its CEO is retiring, and had its long-term debt rating cut to “junk status” by S&P Global Ratings (NYSE:SPGI). In its most recent fiscal year, Newell Brands reported net sales of $8.6 billion, which was below the $9.09 billion consensus expectation of analysts. Company executives says they continue to deal with a “tough operating environment.”
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.