Total return. That’s a combination of growth and the dividend a stock returns. The dividend is kind of like a guaranteed return, even if the stock doesn’t perform or the market rolls over.
That’s why companies that offer dividends are considered shareholder friendly. They return some of their net profits to their investors and generally back that dividend, even in hard times.
You can have your money invested at a better price than keeping it in the bank and get an added growth kicker.
But that doesn’t mean you can pick any stock that provides a dividend.
When times get tough, a company may cut its dividend to keep the company afloat.
Now, that’s not the case in all companies that provide dividends — some have been paying and growing dividends for more than 50 consecutive years.
However, the seven ‘F-rated’ dividend stocks to avoid here aren’t in that select group. They’re in hurting sectors and are struggling to keep their stocks up, and businesses going:
- Strategic Education (NASDAQ:STRA)
- Equity Residential (NYSE:EQR)
- Federal Realty Investment Trust (NYSE:FRT)
- Kennedy-Wilson Holdings (NYSE:KW)
- Energy Transfer LP (NYSE:ET)
- CF Industries (NYSE:CF)
- Walgreens Boots Alliance (NYSE:WBA)
Dividend Stocks to Avoid: Strategic Education (STRA)
The name might not be familiar, but a couple of its products might stand out — Strayer University and now Capella University. Both are online and Strayer has 78 campuses around the U.S. with its original campus in Washington, D.C.
In early November STRA announced the merger with Capella, which will provide some help for both organizations in expanding enrollment around the U.S. during the novel coronavirus pandemic.
STRA’s recent Q3 numbers were down from last year, due to the pandemic. And it also recently sold operations it had in Australia and New Zealand. There’s also talk about starting a culinary school with Sur La Table.
It’s working hard to find a way to succeed in this market, but STRA stock is down 44% year to date. And another bad quarter or two may mean the dividend could be cut, which would send the stock into freefall.
Equity Residential (EQR)
As a real estate investment trust (REIT) you would think that EQR would be having a field day right now.
The problem is, EQR is in the apartment rental market in major cities like San Francisco, Boston and New York. That means two things, neither of which is good.
First, the pandemic has been especially hard on large urban areas due to population density. And when those cities shut down, people lose their jobs. That means rent is no longer a reliable source of revenue.
Second, people that still have jobs and are working from home are starting to look outside of big cities to work. And that means rising vacancies.
This double whammy is hitting EQR stock hard.
The stock is down 26% year to date and has a 4.1% dividend. The risk here is, things could get worse before they get better given the resurgence in the pandemic.
Federal Realty Investment Trust (FRT)
This REIT has been around since 1962, and it has a very good dividend record. But the problem is, while its dividend may be safe, the dividend isn’t going to help your return on the stock, since its properties are focused on locations where the pandemic is making life hard for retailers and renters alike.
FRT focuses on mixed use properties in upscale markets in significant urban centers around the U.S. The problem now is the REIT is exposed to the double whammy of reduced foot traffic for the high-end retailers (and keeping those storefronts occupied) and reduced interest from property owners and renters moving into high-density urban locations.
And with potential localized lockdowns reappearing in major cities as the pandemic worsens, this will continue to affect FRT’s ability to get back to good times. Worst-case scenario means the dividend may be at risk.
But even if its dividend remains intact, the stock is down 30% year to date, so its 4.7% dividend is cold comfort as downside risk rises.
Kennedy-Wilson Holdings (KW)
While KW calls itself an international real estate company, it operates enough like a REIT that it’s in the National Association of Real Estate Investment Trust’s directory.
It has multifamily properties as well as commercial and hotel properties in the U.S. and Europe. That means it’s under the same pressures as the previous REITs but on a global scale. And its hospitality division is particularly under stress, since European nations are locking down once again.
There is still some optimism for KW stock in the markets, but the jeopardy levels are rising. And its current 28x price-to-earnings ratio seems a bit rich for a company with this much at risk.
Also, that P/E is after the stock has sunk 27% year to date. Given where the world is right now, thinking 2021 is going to be on track for a big, global economic recovery may be a bit optimistic. And its rich 5.4% dividend isn’t turning that red to black, and it may be in jeopardy if the pandemic has its way this winter.
Energy Transfer LP (ET)
The midstream energy market — pipelines — is usually a solid place to be when energy prices are volatile, since these companies operate as toll takers for companies using their pipelines. The price of oil and natural gas don’t matter to these companies.
But what does matter is demand. And it’s looking like the U.S. is under siege from Covid-19 and at best that means people are going to stay close to home. Certainly the winter season in much of the country will increase demand for natural gas for heating, and that’s EP’s specialty.
Yet that seasonal demand is baked into its pricing and performance models. This quarter will certainly be weaker than it was a year ago.
Limited Partnerships are the energy patch’s version of REITs. They throw off dividends for investors as a percentage of their net profits. But when prices get hit, dividends rise.
ET stock is down 53% year to date, and it has a whopping dividend of 10.2%. That sounds great, but the higher it gets, the higher the risk of a dividend cut or elimination. And that would be very bad for the stock as well.
CF Industries Holdings (CF)
This fertilizer company has been around since 1946, so it has seen some challenging markets over the years. And generally speaking, fertilizer is a pretty stable business.
CF is the world’s leader in converting natural gas to nitrogen. It has nine manufacturing facilities in the U.S., Canada and the U.K.
The one issue is, this sector can be cyclical. When economies are going strong, the demand for agricultural goods rises and so does the demand for fertilizer.
That isn’t the case now. While CF isn’t in dire straights and will likely get through this current challenging global market, it’s no time to bottom fish the stock.
CF stock is down 33% year to date, so its 3.7% dividend isn’t going to save it from a tough year. And there’s no knowing where the bottom is, so thinking the stock has seen its worst is a risky bet if you’re hoping to sit on that 3.7% dividend here.
Walgreens Boots Alliance (WBA)
On the plus side, WBA stock has 45 consecutive years of dividend growth. On the downside, the stock has been in a significant downward trend since late 2018. Back then, it was trading near $85. Now it’s trading around $37.
Its fiscal Q4 numbers were released in October and they were solid. The pharmacy side of the business was solid if unspectacular and same-store sales were up around 5%.
There isn’t a concern that WBA is going to disappear from the marketplace. But that still doesn’t mean it’s a stock worth holding right now. It is still transitioning its $17 billion purchase of nearly 2,000 Rite Aid (NYSE:RAD) stores in 2018. Given RAD’s struggles, WBA might not be able to fix some of those stores and that could be a drag on the whole company.
WBA stock is down 36% year to date, so its 5% dividend is impressive, but it can’t be the reason to rely on this stock’s ability to recover from here.
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Source: Investor Place