With stocks still in a bear market, adding dividend stocks may look very appealing right now. Even if the overall market keeps dropping, stocks with steady payouts could still produce positive returns for your portfolio. However, while there are opportunities out there for income-focused investors, there are also plenty of dividend stocks to sell if you own them and avoid if you don’t.
As financial commentator Raymond DeVoe Jr. famously put it, “more money has been lost reaching for yield than at the point of a gun.” So-called “yield traps,” or high-yielding stocks with high dividend cut risk, have long ensnared dividend investors.
Investors buy them, thinking they are a seamless way to generate positive returns, only to see the situation turn out badly, either due to the company cutting/suspending its fat dividend payouts, and/or falling in price to an extent that outweighs the yield.
These seven dividend stocks to sell all have a high risk of being yield traps. Although many of them have already tumbled in price, each one could keep dropping. As the risk of a recession keeps climbing, dividend cut risk could become further factored into their valuations.
|Cracker Barrel Old Country Store
|Healthcare Services Group
|Medical Properties Trust
Big Lots (BIG)
Shares in discount retailer Big Lots (NYSE:BIG) skyrocketed during the pandemic. The pandemic lockdowns provided an unexpected boost for big-box stores, a boost extended into 2021 by the post-pandemic economic boom.
Since then, however, the economic environment has gone from favorable to unfavorable for this sector. Record high inflation has both put pressure on margins, as well as curbed demand. In the case of Big Lots, this has resulted in a dramatic swing in profitability.
For the fiscal year ending January 2021, the company reported earnings per share (or EPS) of $16.46. During FY22, EPS plunged to $5.43. For the current FY, Big Lots is expected to report negative EPS of $4.55.
BIG stock may look tempting, as it yields 6.6%, but conditions stay tough for the retail sector, management may be forced to slash/suspend its 30 cent per share quarterly payout.
Cracker Barrel Old Country Store (CBRL)
Cracker Barrel Old Country Store (NASDAQ:CBRL) may not look like a dividend stock to take a hard pass on. So far, macro issues like inflation have only had a small impact on the restaurant/gift shop chain’s bottom line. Last quarter, Cracker Barrel reported EPS of $1.47, down only 3.9% from the prior year’s quarter.
Yet while the company’s earnings may be holding steady for now, enabling it to maintain its current dividend (forward yield of 5.35%), dividend cut risk is still present with CBRL stock. If a recession happens next year, Cracker Barrel’s profitability could continue to move in the wrong direction.
Already paying out the vast majority of earnings out as dividends (payout ratio of 72.4%), CBRL’s management may feel the pressure to conserve cash, and reduce this payout. Both these factors could cause CBRL to give back more of its pandemic-era gains.
Camping World Holdings (CWH)
Sporting a double-digit forward yield (10.5%), Camping World (NYSE:CWH) looks mighty tempting right now.
Beyond just its high dividend, shares in the recreational vehicle (or RV) retailer and provider of RV-related services also look appealing as a contrarian wager on where the economy is headed from here.
Falling around 41.7% over the past year, CWH stock has fallen to a bargain basement valuation of just 5.8 times the sell side’s forecast for 2023 earnings, which factor in a 17.8% EPS decline. That said, it’s possible analysts are underestimating how much a likely 2023 recession will affect Camping World’s operating performance.
The end of Covid-19 tailwinds, coupled with rising gas prices and interest rates, has already curbed RV demand. A recession could make the situation worse. Instead of being a high-yielding bargain, CWH could end up becoming both a yield trap and a value trap.
Healthcare Services Group (HCSG)
Healthcare Services Group (NASDAQ:HCSG) is the rare case of an under-the-radar stock being overvalued, not undervalued. This provider of housekeeping and dietary services to hospitals and nursing homes trades for 26.3 times earnings.
That’s a high multiple, given revenue growth has been minimal, and Covid-19 has severely affected the company’s earnings. With a high forward yield (6.95%), and a track record of dividend increases, if its dividend policy stays constant, the stock could avoid another drop.
However, it’s questionable whether Healthcare Services Group can continue to maintain its current payout, much less increase it. Its current payout ratio is a staggering 178.3%.
Even if analyst estimates are correct, and HCSG’s EPS climbs back to 75 cents next year, this isn’t enough to cover its current annual payout of 86 cents per share. A dividend cut, or simply no longer increasing the payout, may send shares tumbling.
Joann Inc. (JOAN)
Previously, I’ve discussed why Joann Inc. (NASDAQ:JOAN) is one of the top dividend stocks to sell. Trading for around $8.70 per share, I argued that there was a strong chance of shares in the fabric chain continuing to drop, as inflationary pressures affected its operating performance.
My bearish thesis on JOAN stock has played out, with the stock falling another 19.5% since then. A more severe price decline, though, may lie ahead. Despite a material drop in profitability, Joann’s management has yet to slash/suspend the company’s dividend payout (forward yield of 6.29%).
Its appeal to yield-chasing investors has likely kept JOAN from falling to even lower prices, but if a dividend cut dampens its appeal to income investors, the stock could fall to a price more befitting of a debt-laden, unprofitable business with murky prospects. This signals it’s best to stay away.
Medical Properties Trust (MPW)
Real estate investment trusts, or REITs, have been hit hard in today’s rising rate environment.
Some may see opportunity here, as it’s possible the market is overestimating how much further interest rates rise, but among scores of high-yielding REIT stocks, one you may want to avoid/sell is Medical Properties Trust (NYSE:MPW).
Sure, MPW stock looks oversold. It trades at a low multiple, and has a forward yield of 9.72%, despite being in what may be a more recession-resistant segment of the REIT industry (healthcare). Still, while on paper it may seem cheap, attempting to bottom-fish in Medical Properties Trust could end badly.
There may be a risk with this REIT’s largest tenant, hospital operator Steward Health Care System. Steward’s financial issues could keep weighing on MPW stock’s performance. While its dividend may be secure, a further drop in MPW’s share price could outweigh this high payout.
National CineMedia (NCMI)
It’s not hard to see why National CineMedia (NASDAQ:NCMI) is one of the dividend stocks to sell.
The movie theater advertising company has already slashed its dividend since the start of the pandemic. Since early 2020, NCMI’s quarterly payout has dropped from 19 cents to 3 cents.
Yes, 3 cents per quarter, or 12 cents per year, gives NCMI stock a forward yield of around 16% at today’s prices, but I wouldn’t bank on this being sustainable. National CineMedia also faces the issue of an extremely levered balance sheet. The company has $900 million in outstanding long-term debt, which its management is scrambling to restructure.
To avoid bankruptcy, NCMI may have to cut its payout to zero. Other restructuring moves, like converting debt to equity, could dilute shareholders. Buying National CineMedia for its yield is a “picking up nickels in front of a steamroller” type situation.
On the date of publication, Thomas Niel did not hold (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.