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By Wayne Duggan
| December 29, 2016
There are several rules of thumb when it comes to picking out the best investments for retirees. Dividend stocks are popular investments for retirees because of the power of dividend compounding over time. In addition, dividend stocks are typically blue-chip companies with solid cash flows and long track records of strong performance.
It’s certainly not bad advice to recommend a retiree buy stocks in companies with recognizable brands and high dividend yields.
Unfortunately, there are exceptions to every rule of thumb, and dividends aren’t necessarily guaranteed. Potash Corporation of Saskatchewan (USA) (POT), Noble Corporation Ordinary Shares (UK) (NE) and Kinder Morgan Inc. (KMI) are just three examples of recognizable companies that have cut their dividends recently.
Not only have investors been denied the dividend yield they thought they were getting, but stocks in danger of dividend cuts tend to underperform in the market as well.
Retirees should look deeper than a stock’s dividend yield before investing for the long-term. With that in mind, here’s a look at three recognizable dividend stocks retirees should avoid at all costs.
Wt90401 via Wikipedia
At first glance, Abercrombie & Fitch Co. (ANF) and its 6.6% dividend yield may look like a great buy for a retiree. Unfortunately, ANF stock is raising all kinds of red flags. For starters, Abercrombie’s business is shrinking. Revenue is down 18.2% in the last five years, despite the fact that the U.S. economy has boomed.
The problem doesn’t seem to be getting any better. ANF stock hasn’t registered a single quarter of positive year-over-year revenue growth in the last eight quarters.
Another major red flag is the company’s payout ratio. The payout ratio is a measure of just how much of a company’s profits are going right back out the door to make dividend payments. Ideally, retirees should look for payout ratios under 50%. The lower the better. Today, Abercrombie’s payout ratio is an incredible 470%. That’s a major warning sign that ANF stock won’t be able to continue on this path for much longer.
Five years ago, Abercrombie paid a dividend in the 1.5% to 2.5% range, which is fairly typical for dividend stocks. Don’t be surprised to see the company cut its dividend back to that range in the near future.
Mike Mozart via Wikipedia
Staples, Inc. (SPLS) is another popular brand that retirees might recognize as having a long history of success. Unfortunately, SPLS stock has not adapted well to the digital age. Revenue is down 17.6% in the past five years. In the most recent quarter, sales declined another 4%.
Staples was hoping a merger with rival Office Depot Inc. (ODP) would provide a lifeline for the ailing company. Unfortunately, the merger was blocked on antitrust grounds.
Where does that leave SPLS stock and its generous 5.1% dividend?
Possibly the only thing worse than a 400% payout ratio is a negative one. Staples reported a loss of $460 million in earnings in the last four quarters. That means that the company paid out its expensive dividend even though the company was not profitable on the year. For the record, SPLS stock expects to return to profitability in 2017, but that doesn’t mean its dividend is safe.
Staples is definitely one of the dividend stocks retirees should avoid until the company proves it can compete in the digital age.
When it comes to the digital age, few businesses have been hit harder than bookstores. With a dividend yield of 4.9%, Barnes & Noble, Inc. (BKS) is showing all the symptoms of a dividend cut.
In the last five years, revenue is down 10.5%. The company has reported negative earnings-per-share in each of the last three quarters and BKS stock’s payout ratio currently sits at 300%. Something has got to give for Barnes & Noble, and that dividend may soon be on the chopping block.
Retirees may have nostalgic memories of buying their favorite books at Barnes & Noble stores. But a long-term investment in BKS stock at this point is way too high-risk for retirees.
Since Barnes & Noble reinstated a $0.60 annual dividend in 2015, the stock’s share price has fallen more than 30%. A nearly 5% dividend yield is meaningless for BKS stock when its value falls by seven times that amount.
When it comes to high-yielding dividend stocks, retirees should stay away from Barnes & Noble.
This article is from Wayne Duggan of InvestorPlace. As of this writing, he did not hold any of the aforementioned securities.
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