Steer Clear of These 10 Dividend Stocks
Inflation is all over the news. Whether it’s business, consumer or political news, we simply cannot escape it, and folks will continue to debate it.
The Labor Department recently reported that its Producer Price Index (PPI) rose 0.2% in October and 8% year-over-year, down from September’s 8.4% increase. Excluding food and energy and trade services, core PPI increased 0.2% in October and 5.4% in the past 12 months.
The Labor Department also revealed that its Consumer Price Index (CPI) increased 0.4% in October and 7.7% in the past 12 months — although this is lower than June’s 41-year-high of 9%. Core CPI, which excludes food and energy, also rose 0.3% on a month-to-month basis and 6.3% year-over-year.
I should also add that earlier this month the Federal Open Market Committee (FOMC) members voted unanimously to raise the Fed Funds rate by another 0.75%, as our central bank attempts to curb inflation and get key interest rates more in synch with Treasury rates. The Fed Funds rate now stands between 3.75% and 4.0%.
The Fed gave an unexpectedly dovish statement, saying, “In determining the pace of future increases in the target range the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation and economic and financial developments.”
Essentially, the Fed plans to evaluate how much it should raise rates in the future and to take into account that there is a lag in the economic data. So, at first, it appeared that the Fed was nearing the end of its rate hike cycle.
However, Fed Chairman Jerome Powell gave an opposing hawkish statement, saying, “It is very premature, in my view, to think about or be talking about pausing our rate hikes. We have a ways to go.”
We’ll gain more clarity at the December FOMC meeting, but one thing is clear now: We remain in an inflationary environment – and inflation will likely remain elevated for the foreseeable future.
As a result, more and more people are turning to dividend-paying stocks as good hedges against inflation. This helps investors for a couple of very important reasons.
Firstly, high-yielding dividend stocks actually can outpace inflation in the long term. And while inflation can cause volatility across most of the market, dividends tend to exhibit less volatility than stock prices and earnings.
Within the S&P 500, cash dividends for the third quarter were up 8.5% year-over-year – a record payment that is expected to increase in the fourth quarter. For full-year 2022, cash payments are expected increase 10% from cash payments in 2021.
Now, before you jump into any dividend-paying stock, I should warn you that not all dividend stocks are created equal. But before I explain why, let’s take a step back and talk about what exactly a dividend is.
A dividend is a distribution from a company’s earnings paid directly to a class of its shareholders. It is up to the company as to when (or even if) it is paid. The dividends tend to be paid out on a quarterly basis, but some companies will pay a semi-annual or annual dividend. Company management will always announce when it will be paid – including your deadline to buy the stock in order to receive this payout – and what the dividend will be per share.
Now, the dividend yield varies depending on the company’s actual dividend and where the stock price is at the time. In some cases, you may be looking at a double-digit dividend yield. But as attractive as a double-digit dividend yield may sound, I recommend you pump the brakes before investing. Chasing dividend yields alone can be downright dangerous.
Stocks are not like Treasury bonds or a savings account: There’s no guarantee that you will get your money back. There’s also no guarantee that company will continue paying a dividend. If you choose poorly, you could lose your capital as the stock price falls. Or, that nice juicy dividend could be slashed.
In most cases, dividend yields are tantalizingly high for a reason (the stocks are cheap and rightly so) – and are simply not supported by the fundamental earnings power of the business.
This is why my Dividend Grader is so important. Just like my Portfolio Grader, it uses my proprietary formula to put each stock through a rigorous test, crunching reams of data against a set of criteria I’ve created. Specifically, Dividend Grader measures a dividend stock’s Dividend Trend, Dividend Reliability, Forward Dividend Growth and Earnings Yield. All this comes together to deliver you a Total Grade. Just like Portfolio Grader, an A- or B-rating is considered a “Buy,” a C-rating a “Hold,” and a D- or F-rating a “Sell.”
Here are 10 examples of dividend stocks with high dividend yields but also hold an F-rating in Dividend Grader, indicating that you should stay far, far away:
|Company Name||Ticker||Dividend Yield||Total Grade|
|SuRo Capital Corp.||SSSS||104.81%||F|
|Golden Ocean Group Ltd||GOGL||33.84%||F|
|Presidio Property Trust, Inc. Class A||SQFT||29.13%||F|
|Orchid Island Capital, Inc.||ORC||28.75%||F|
|Herzfeld Caribbean Basin Fund Inc||CUBA||26.88%||F|
|Invesco Mortgage Capital Inc.||IVR||25.79%||F|
|Bancroft Fund Ltd||BCV||23.49%||F|
|Betterware de Mexico, S.A.P.I. de C.V.||BWMX||23.11%||F|
|Western Asset Mortgage Capital Corporation||WMC||21.95%||F|
|Great Elm Capital Corp||GECC||20.52%||F|
As you can see, each company has a huge double-digit dividend yield (the first on the list even has a triple-digit dividend yield!), but it also receives an “F” rating from Dividend Grader, making these stocks all Strong Sells. This is because their dividend trend, dividend reliability, forward dividend growth and earnings are very, very poor.
Now, I don’t want to scare you away from dividends – far from it. I just want you to be aware of the potential risks. Investing in dividend stocks can also be very lucrative. If you get it right, you can make a fortune. Fundamentally strong dividend stocks pack a one-two punch of share price appreciation and a steady stream of income… with payouts that can be twice or five times what you get from a Treasury bond or a bank.
My Growth Investor service features the crème de la crème of dividend growth stocks. I call this my Elite Dividend Payers Buy List. A stock only makes it to this special list if it receives a “AA” rating, which means it must have an “A” rating in both Dividend Grader and Portfolio Grader. So, not only does the stock boast a solid (and reliable) dividend, but strong fundamentals to boot!
In fact, I recommended two brand-new coveted AAA-rated stocks in my latest Growth Investor Monthly Issue last week. The AAA-rating indicates an A-rating in Dividend Grader, an A-rating in Portfolio Grader and an A Quantitative grade. In other words, it offers the perfect blend of income, growth and persistent institutional buying pressure.
They also have solid dividend yields, great long-term potential and are still trading below my recommended buy limit. You won’t want to miss out on these exciting opportunities, so make sure to sign up here so I can reveal their names to you.
Once you sign up, you’ll have access to my full Elite Dividend Payers Buy List – chock-full of fundamentally superior dividend-paying companies – and my High-Growth Stocks Buy List, which continues to steadily appreciate.
If you add it all up, my Growth Investor stocks are characterized by 66.1% annual sales growth and 505.5% annual earnings growth – and they’re showing no signs of earnings or sales deceleration. The analyst community has also revised its consensus earnings estimate 24.4% higher in the past three months, which bodes well for future earnings surprises.
This is important because the market is growing more fundamentally focused in the wake of the third-quarter earnings announcement season.
The bottom line: Millions of Americans are pouring money back into the stock market in search of higher yields and protection from inflation – and they’re seeking out stocks with the strongest fundamentals.
P.S. Too many people are living in fear about having enough to pay basic living expenses, and too many retirees worry that their savings won’t last – all thanks to inflation. As a former federal banking regulator, I can say with 100% certainty, this trend will only worsen over the coming decade.
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