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Just about everybody loves a good dividend stock, whether you're an income investor or just looking for some guaranteed returns.
It's even better when you can find businesses that pay solid dividends and can still grow fast enough to provide market-beating returns at the same time. While it's a difficult task to find those types of businesses, it's much easier to see dividend stocks that you should avoid. Here are two big name companies that dividend investors should be wary of.
Don't be tempted
The first company is none other than AT&T Inc. . At first glance investors might be tempted to buy into AT&T's dividend, as the yield is nearly 5.5%, easily attractive for income investors. Further, when looking at AT&T's history, it seems like a company that consistently rewards investors with regular dividend increases.
However, despite its historically strong dividend payout, AT&T's business isn't as lucrative as it once was, and holding AT&T simply for its dividend could burn investors. AT&T's cash flow hit a speed bump and was weak throughout 2014, and the company hopes that reining in its network spending will enable cash flow levels to rebound this year. However, that's no guarantee in the telecom services market, and if smaller wireless carriers --Sprint and T-Mobile for example -- decide to compete even more aggressively on price to steal market share, it would put AT&T's profitability in a tough spot.
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Furthermore, as competition and substitution products from cable companies continue to increase, it could hinder AT&T's local phone business, which is a huge cash cow for the company. Any hindering of that business would put AT&T's lofty dividend yield in jeopardy of being slashed.
AT&T isn't the only company facing big problems, which brings me to the next company investors would be wise to avoid, at least for now: Caterpillar Inc. .
No turnaround in sight
Caterpillar also boasts a history of healthy dividend increases, all while shrinking the number of shares outstanding -- both great ways to return value to investors.
Last year was rough for Caterpillar, with sales, revenue, and net income all in decline. Despite all of the downside, Caterpillar was still able to repurchase a staggering $4.2 billion of its stock, and dished out $1.6 billion to investors in the form of dividends, actually increasing its quarterly payout by 17%.
The problem isn't with Caterpillar's current dividend yield of 3.4%; rather it's with the company's core business. Even management admits that 2015 isn't the year Caterpillar's business will rebound. As China's growth slowed significantly, so too did Caterpillar's sales overseas. In fact, the company's Resource Industry business segment was once the company's cash cow, but look how far it has fallen.
Chart by author. Information source: Caterpillar.
On top of weakness in sales of its mining equipment, which fuels the success of its Resource Industries segment, current oil prices are a significant headwind for its Energy & Transportation segment in the near-term. That's a really bad combination, as Caterpillar's Energy & Transportation business had been its sole bright spot in recent years.Chairman and Chief Executive Officer Doug Oberhelman said the following in a press release:
"In addition, with lower prices for copper, coal and iron ore, we've reduced our expectations for sales of mining equipment. We've also lowered our expectations for construction equipment sales in China. While our market position in China has improved, 2015 expectations for the construction industry in China are lower."
While Caterpillar's and AT&T's dividend history might make it tempting to buy shares, with both businesses facing numerous challenges in the near-term, investors would be wise to sit on the sideline for now.
The article Dividend Investors: 2 Tempting Stocks You Would Be Wise to Avoid originally appeared on Fool.com.
Daniel Miller has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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