A stock market crash can be great for dividend stocks, but not for this list of dividend stocks to avoid. If one believes that the correction in the broader indices such as the S&P 500 is only temporary, then the dividend yield paid by these companies increases, which increases one’s long-term income potential. One can then improve their cost basis and yield-on-cost (YoC) as dividends rise in the future.
However, a stock market crash may not be beneficial for these dividend stocks to avoid. These companies have problematic balance sheets or inconsistent earnings. Some have fears about their competitive moats or excessive debt levels. Whatever the case is, a simple reduction in their share prices don’t fully offset these risks, and effectively make them yield traps for unwary investors.
So in order to focus on the highest quality investments, I’ve put together a list of seven dividends stocks for investors to consider avoiding if we see a major correction in the markets. One should opt for blue-chip Dividend Kings or Aristocrats during these conditions instead, as this can help protect capital as well as increase one’s income potential for the long haul.
AT&T (T)
AT&T (NYSE:T) has been facing declining revenues in traditional business segments, increasing competition, and high debt levels. Additionally, recent dividend cuts have raised concerns. It’s a classic example of how an iconic household brand can fall so far from grace, and that no “blue-chip” investment is ever a set-and-forget investment.
However, in Q3 2023, AT&T reported revenues of $30.4 billion, marking a 1% increase compared to Q3 2022. The company saw a 3.7% increase in Mobility service revenues, contributing to continued profitability. AT&T’s business wireline segment faced a decline, with revenues falling by 10.3% in 2023.
Problems still persist for the business, namely that its dividend growth streak was cut short in 2022 and its dividend has not grown since then. Meanwhile, its share price has also slid 27.41% over the past five years, offering investors neither steady growing returns or capital depreciation, but the opposite.
Altria (MO)
Altria (NYSE:MO), the maker of the cigarette brand Marlboro is my least favorite Dividend King. I believe that it has all the characteristics of a yield trap. MO’s top-line has eroded significantly, and its capital depreciation has led it to pay a 8.91% dividend yield to investors. This also comes with a dividend growth rate that has moderated at around 4.65% since 2021.
MO’s top line has experienced top-line erosion since 2021, and its shares have slipped 18.19% over the past five years.
The problem with MO is that it offers premium cigarettes, which, with the existence of smoke-free alternatives such as vaping, competes for the same primary demographic as young people, who also prefer to smoke Marlboros. Young people have less disposable income than older generations, and vaping is the preferred choice over more expensive brands. The notion of “dual use” is notably seen in the older generation.
It has also failed to enter into the smoke-free market through a series of acquisitions that have failed, and its long-term trajectory seems uncertain at best.
There are less risky investment choices for investors to choose from that MO, as it is essentially running against the clock to make a giant pivot to the smokeless segment, which will be an unprecedented feat for Altria’s management team, and possibly any management team.
Exxon Mobil (XOM)
Exxon Mobil (NYSE:XOM) faces challenges from the shift towards renewable energy, volatile oil prices, and regulatory concerns.
Just like the case with MO, I think that some investors’ thinking is stuck in what the market conditions looked like a decade ago instead of what they look like today. Believing that XOM’s past performance will continue in the future is speculative, given that it faces substantial challenges.
To underline my bearishness on the energy sector in general, I have a portfolio of fifteen dividend stocks and none of them are in this sector. Despite their historically high dividend yields and growth rates, there seems to be too much uncertainty about how giants like XOM will fundamentally alter their business models to ones that are carbon-free.
Illustrating bearishness in the short-term is that five Wall Street analysts have made the consensus that its EPS will drop sharply by 17.49% in FY2027, and this includes a substantial revenue drop as well.
Whether this specific forecast plays out or not is neither here nor there. It signals the risks of the energy sector in any case, and likely points to deeper structural issues that exist just below the surface.
3M (MMM)
3M (NYSE:MMM) is known for its diversified technology and manufacturing of products across various sectors. However, the company faces legal challenges and liabilities associated with its chemical products, alongside declining sales in several key business segments.
Don’t get me wrong, I love MMM as a business, given that it’s perhaps one of the most diversified companies on the planet. However, I believe that its dividend is at risk, growing ever so slowly since 2021. It has negative profit margins and a weak free cash flow margin at the time of writing.
The company’s business model is very appealing, and its dividend yield of 6.24% may be inspirational due to its income potential. However, like the case with XOM or MO, it’s navigating a sea of high risks, and may not suit an investors’ portfolio if they prefer more conservative investments, as owning dividend stocks could naturally imply. It’s therefore one of those companies that investors should reconsider owning.
Ford Motor (F)
Ford Motor (NYSE:F) is a major automotive manufacturer. Despite its efforts to expand into electric vehicles, Ford faces intense competition from new entrants in the EV market.
The one exception I have for Ford is that it may be suitable for those who are comfortable selling covered calls on it given its stock price is just $12.49 at the time of writing. Along with its dividend yield of 3.57%, this could help reduce one’s cost basis and justify holding if done successfully over long periods.
However, for most people who don’t have such active involvement with their portfolios, Ford looks appealing but there are deeper issues from an income and competitive point of view. For one, F had a streak of around six years of either zero dividend growth or dividend cuts. Some of this was offset by its stock price increasing around 19%.
The bigger question remains of how it will compete with the likes of Tesla (NASDAQ:TSLA) and firmly entrenched Chinese competitors such as BYD (OTCMKTS:BYDD). Both reign in their respective operating segments of the U.S. and East Asia, and F’s late start in the industry may prove to be highly significant.
GE Aerospace (GE)
GE Aerospace (NYSE:GE) formerly known as General Electric Aviation, operates in sectors such as aviation, power, and renewable energy. While GE has been restructuring to focus on core areas, its high debt load and legacy liabilities continue to pose financial challenges.
GE may be one of the most well-known falls from grace in the dividend investing community, having had its Dividend Aristocrat status within the past year. Other concerns for GE include being the worst-performing constituent of the S&P 500 last month, and I believe that its problems are going to get worse than this.
The company trades at a high valuation at 53 times earnings, and its liquidity ratios are questionable with its quick ratio of 0.7. Over time it has managed to balance its booked with roughly equal measures of both debt and cash, but the fact remains it is highly leveraged.
Its valuation alone makes it a question buy, and I think that it could be sold off steeply due to this fact if the whole market takes a turn for the worse.
Kraft Heinz (KHC)
Kraft Heinz (NASDAQ:KHC) is a large food and beverage company. The company has struggled with brand relevance as consumer preferences shift towards healthier and more sustainable options.
Furthermore, the company has experienced fluctuations in its financial results. For instance, diluted EPS was down 15.3% compared to the previous year, highlighting ongoing challenges in achieving consistent financial growth.
Kraft Heinz has also faced issues related to environmental sustainability and has been involved in legal challenges, such as a significant settlement related to securities litigation. Such factors not only affect the company’s finances but can also impact its reputation and consumer trust.
Although the company’s stock price has increased 12.71% over the past five years, its future is uncertain and speculative as healthier alternatives emerge. When your key brand is about a product that everyone associates with being unhealthy, making such a pivot is perhaps an unreasonable task. This is why KHC is one of those dividend stocks to avoid.
On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.