In this volatile market, many investors are flocking to the relative security of dividend stocks. But as with any investment, you must perform your due diligence particularly when it comes to a stock’s dividend yield. In many cases, a high yield can make a dividend stock a good buy. But in some cases, a high yield is your first warning sign that a stock should make the list of dividend stocks to sell.
Dividend-paying stocks offer all investors a safe way to boost their total return. For income investors, particularly those who are in retirement, these stocks can provide a reliable stream of income. However, if the dividend gets cut, so does the expected income from that stock. And that usually occurs when a stock has a high yield that is not supported by its revenue and earnings. That makes them yield traps which can make what was a safe investment not so safe for investors.
The three dividend stocks to sell in this article fit that description of a yield trap. With that said, investors should take extra caution before taking or adding to a position in these stocks. Remember, selling a stock doesn’t have to mean goodbye forever. But at a time when there are better options to be found, it’s time to sell these stocks.
|Telephone and Data Systems
Telephone and Data Systems (TDS)
In some ways, the name Telephone and Data Systems (NYSE:TDS) says a lot about why this stock is on the list of dividend stocks to sell. The word “telephone” is not really in our lexicon anymore. TDS is the parent company of US Cellular which is the fourth-largest wireless carrier in the U.S. The problem is one that will be familiar to all the stocks on this list. Revenue is stagnant and earnings are dropping both sequentially and year-over-year. That’s not surprising with corporations managing through a higher interest rate environment.
The larger problem however is the company’s negative dividend payment ratio. And it’s not just negative, it’s massively negative at –924.88%. When this ratio is negative it means that a company is likely borrowing to pay its dividend. That’s not sustainable, and even though this company is on the brink of being a dividend king, it’s more likely that it will cut its dividend.
PetMed Express (PETS)
With a dividend yield of 7.65% and a median price target that suggests the stock could have a 20% upside, PetMed Express (NASDAQ;PETS) might seem a curious candidate among dividend stocks to sell. But you don’t have to look too far to see why this small-cap provider of prescription and non-prescription medications, health products, and other supplies for dogs and cats is a potential yield trap.
Revenue and earnings are both falling on a sequential and year-over-year basis. Short interest is exceptionally high at over 22%. And Morgan Stanley recently cut its rating on PETS stock to Underweight and lowered its price target to $17 which is under the consensus target.
There’s no question that pets are commanding a larger percentage of wallet share from consumers. However, this is a sector where there is no moat and other competitors are entrenched. PetMed may survive as a business. Though, when a company is not growing enough to support its dividend, it’s only logical that the dividend is likely to be cut.
Via Renewables (VIA)
Via Renewables (NASDAQ:VIA) is a small-cap independent retail energy services company based in Houston. However, it doesn’t have anything to do with renewable energy the way it’s currently defined. The company provides electricity and natural gas to a network of residential and commercial customers in 19 states.
Of the companies on this list, Via Renewables has the most eye-popping dividend yield at 22.16%. But it comes with some red flags. First, the payout ratio is negative to the tune of –229%. A second factor to consider is that VIA stock is down 58% in the past year and over 70% in the last five years. And to add a third issue to the list, the company just executed a 1-for-5 reverse stock split in March.
It may be tempting to view the stock as an attractive option as natural gas and electricity demand will remain strong. But this is a time when looks can be deceiving. There are better dividend payers in the energy sector.
On the date of publication, Chris Markoch did not have (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.