There are certain characteristics I look for when choosing dividend stocks for my portfolio. Just to name a few, I like to see a sustainable payment, clear competitive advantages, and room for consistent future growth. There are many dividend stocks that look appealing, but here are three rather popular stocks that you won't find in my portfolio anytime soon -- and why I'm staying away from each one.
Too many unanswered questions
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To be clear, I wrote in favor of Wells Fargo several times after its fake-accounts scandal was revealed. Things of that nature, while certainly big mistakes, are generally intermediate-term headwinds and aren't too concerning from a long-term perspective.
However, that was before the subsequent wave of mini-scandals and, more importantly, the Federal Reserve's unprecedented penalty that was imposed on the bank.
If you aren't familiar, the Fed announced in February that because of Wells Fargo's consumer abuses and questionable practices, the bank would be prohibited from growing any larger than its total assets at the end of 2017 until "sufficient improvements" are made.
While CEO Tim Sloan has done a commendable job of trying to right the ship, there are simply too many unanswered questions at this point. For example, what constitutes sufficient improvements? Just how badly will the wave of scandals hurt Wells Fargo's business?
I'm not saying that Wells Fargo won't be fine over the long run. However, a bank that isn't allowed to grow and that is still experiencing fallout from numerous scandals isn't my idea of an attractive dividend investment.
Can this high dividend be sustained?
If you think a 12% dividend yield looks too good to be true, it's because more often than not, it is. And after looking a bit deeper into the numbers, that's exactly why I'm avoiding high-yielding telecom CenturyLink.
For one thing, CenturyLink has more debt than peers with a debt-to-equity ratio of about 1.6:1. For comparison, 6.2%-yielding AT&T has a debt-to-equity ratio closer to 1.2:1 -- significantly less.
Furthermore, CenturyLink simply doesn't earn enough to justify such a high dividend. The company's current annualized payout rate is $2.16. Meanwhile, CenturyLink earned $1.59 per share last year and is projected to earn just $1.04 per share in both 2018 and 2019. Furthermore, free cash flow has steadily declined from $5.07 per share in 2012 to just $3.02 in 2016 and $1.23 last year. The 2017 number is low due to the acquisition of Level 3 Communications, but there has been a clear downtrend for some time. In short, I'm not sure how sustainable the dividend is.
Can this retailer adapt to the changing environment?
With the trend toward e-commerce, there are three main types of brick-and-mortar retailers that still have lots of potential. Discount-oriented retailers like Walmart, experiential retail like movie theaters, and non-discretionary retail like gas stations are all well-positioned to remain competitive.
Unfortunately, home furnishings retailer Bed Bath & Beyond (NASDAQ: BBBY) doesn't fit into any of these categories. A look at the recent earnings numbers confirms that the company is struggling. Profits fell 20% year over year, and same-store sales have declined for nine straight quarters.
Bed Bath & Beyond has lost more than 77% of its value since peaking in 2014, but that doesn't mean the stock is a bargain. A continued push toward e-commerce could continue to put pressure on margins, and there's no reason to believe that foot traffic in the company's stores will increase anytime soon. Plus, the fact that there isn't a clear turnaround plan yet is perhaps the biggest concern of all, from an investor's perspective.
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