2 Dividend Stocks to Stay Away From -- and 1 Worth Buying

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ExxonMobil Corporation (NYSE: XOM) and General Mills, Inc. (NYSE: GIS) have been incredible investments over the long haul. One thousand dollars invested in either of these dividend stalwarts 40 years ago would be worth an amazing $70,000 in total returns today, with the vast majority coming from dividends. But more recently, neither has made for a very compelling investment. Both have underperformed the S&P 500 and Dow Jones Industrial Average over the past one-, three-, and five-year periods, and there's little evidence to expect that to change in the near term.

So what's a dividend investor to do? A great place to start is finding companies with big long-term trends ahead of them that can drive years of profit (and dividend) growth. One of my favorite dividend stocks is CareTrust REIT Inc (NASDAQ: CTRE), which has big prospects from a huge trend and is approaching value territory.

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Keep reading to learn why General Mills and ExxonMobil could struggle, and why Caretrust is likely to be a big winner for dividend investors.

Losing its edge

For years, ExxonMobil was the oil company all of its integrated major peers wanted to be. The company's management has historically done an excellent job managing capital allocation, and that paid off with better returns than other oil majors. However, as oil prices trended down over the past several years, even ExxonMobil's high rates of return fell:

The company is still getting better returns than many of its peers, but it isn't getting anything like the rates of return it has in the past. Management says it has a plan to improve its profitability and bring its returns back up, but I'm not convinced that it's going to happen quickly enough to make the company worth investing in -- at least not now.

I know there's an argument that the company's stock price is too cheap to ignore. And there's some truth to that, since it is approaching value territory, and the 14% it has fallen from its recent peak has pushed its dividend yield up to 4%. But until ExxonMobil's management shows it can deliver higher rates of return and start growing profits again, the stock belongs on your watchlist, not in your portfolio.

Fading from relevance

General Mills is the name behind some of the best-known packaged food brands in the world, including Betty Crocker, Green Giant, and Pillsbury, not to mention dozens of popular breakfast cereals many of us grew up eating. These brands have fed millions of us for decades and made investors billions along the way, but the stark reality is that many of them have lost and continue to lose relevance -- and market share -- as consumer tastes shift to brands with more favorable health and environmental reputations.

This is a key reason (though not the only one) why General Mills' sales and profits have fallen:

The company has taken steps to counter the trend of losing customers, with mixed results. It has acquired some of the natural and organic packaged food brands that have been eating its lunch, as well as changed the ingredients in some of its own products to make them more appealing to consumers (some with more success than others.)

The worst could be in General Mills' past. In the second quarter, management said that organic sales -- sales of brands the company owned for more than one year, not organic products -- increased in all four of its operating segments. Yet even within this result, it's important to note that sales were still only up 2% in the period, and profits continue to decline. The company reported an 8% decline in constant currency operating profits, an 8% decline in earnings per share (EPS), and a 5% decline in adjusted EPS. So even with some stabilization of sales, General Mills isn't delivering earnings growth right now.

Its 3.5% dividend yield is above average, but its weak earnings growth and basically flat sales make it hard to justify paying 21 times last year's earnings. It remains a solid business with strong cash flows and fundamentals, but investors can do a lot better than paying a premium price for what is likely to be a mediocre investment.

On the right side of the big trend

CareTrust REIT doesn't have the track records of ExxonMobil or General Mills, having only gone public in 2013. But just as those two companies have spent decades taking full advantage of big trends -- namely increasing oil and gas and packaged foods consumption, respectively -- CareTrust should spend the next two decades profiting from the doubling of America's elderly population.

Around 3 million baby boomers will reach retirement age every passing year between 2010 and 2029. When the last boomer retires in 2029, America's 65-plus population will have doubled to 80 million individuals. The 80-plus population is expected to more than double as well. This steady growth in older Americans will require significant investment in healthcare and housing. As a small real estate investment trust focused on this segment, CareTrust has grown at a much faster rate than the rest of the industry.

Since going public, CareTrust has more than doubled its facility count, increased the number of beds/units in its portfolio by 125%, and grown its annualized initial rents by 71%. A somewhat aggressive expansion has caused its earnings and funds from operations -- a key metric for measuring REITs -- to swing up and down a bit in recent quarters, but management is doing an excellent job acquiring good properties and partnering with excellent healthcare operators to run them. Its earnings may be lumpy over time, but they should also continue to trend higher:

Furthermore, CareTrust is a solid value, with shares selling for 12 times guidance for 2018 FFO, and its dividend yield is almost 4.9%. Considering its reasonable price, high yield, and very strong long-term prospects, CareTrust is a far better dividend stock to buy than ExxonMobil or General Mills today.

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Jason Hall owns shares of CareTrust REIT. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.