3 Monster Dividends I'm Staying Away From

When it comes to investing, there's no more direct route to sharing in corporate profits than by buying dividend-paying stocks. But not all dividend-paying stocks are created equal. Below, I'll detail three companies with monster dividends that I'm staying away from.




Earnings Payout Ratio

Free Cash Flow Payout Ratio

Roundy's (NYSE: RNDY  ) Groceries 9% 19% N/A
Frontier (Nasdaq: FTR  )   Communications 8.8% 523% 85%
Nokia (NYSE: NOK  ) Electronics 6.6% N/M N/M

Source: Yahoo! Finance, SEC filings. N/M = not meaningful because of negative earnings and free cash flow. N/A = not available because of incomplete historical information.

Before going any further, it's worth noting that I have an investing style that works for me, but may not for other people. I prefer to buy and hold companies that I'm proud to own, regardless of how they perform as investments. After that, I hope to buy at a fair price.

A grocer selling out
Roundy's runs several chains of grocery stores in the Midwest, primarily in my native Wisconsin. There are a couple of things to worry about, here.

First and foremost is the fact that the company's chains of Pick n' Save, Copps, and Rainbow stores aren't particularly distinctive. Surely, they have a dominant market share right now, but they are ripe for disruption by the likes of Whole Foods (Nasdaq: WFM  ) type outfits. Roundy's Mariano's Fresh Market has promise in the Chicago area, but there are currently only five in existence.

It's a little too early to get a good feel for how safe Roundy's is, primarily because it just went public. Its reasons for going public, however, should give investors pause. The company's owners were ready to get out of the business, but couldn't find anyone willing to buy them out, so they just did an IPO.

Not exploring any new frontiers
In June 2011, Fool analyst Jim Royal put together his "World's Greatest Dividend Portfolio," and Frontier made the list. Though the company has seen an uptick in recent weeks, spurred by insider buying, Jim isn't so hopeful anymore, saying he expects to unload shares when they hit what he sees as their fair price.

The company, which provides Internet and telephone services for rural America, hasn't been heading in the direction investors have hoped for. The company's acquisition of Verizon's rural business put it on the map, but Frontier executives may now be getting a taste for why Verizon was willing to part ways with those accounts in the first place.

As it stands, Frontier is using most of its free cash flow to pay its outsized dividend, and any reduction in the core business will likely lead to a shrinking or suspended dividend.

From first to worst in no time flat
Nokia and fellow communications company Research In Motion have been steamrolled in the smartphone revolution. While Samsung is selling lots of phones, Apple's (Nasdaq: AAPL  ) iPhone 5 is generating all the buzz, and Google's Android operating system is ever-popular on the global stage -- and these two have been left in the dust.

Sure, emerging market numbers and rumors of a new smartphone have helped push the stock higher lately, but let's look at the facts. Nokia has a decreasing market share, and it simply doesn't have enough cash on hand to continue paying its dividend. Furthermore, the company just can't seem to define itself against its superior competition.

Learn more
Not everyone's convinced that Frontier Communications can't turn things around. Find out what analyst Dan Caplinger thinks in his premium report on the company that comes with exclusive access to real-time updates throughout the year. You can also get more information about Apple and Whole Foods in similar reports from top Fool analysts. Click on the links to get your copy today.

Fool contributor Brian Stoffel owns shares of Google, Whole Foods and Apple. The Motley Fool owns shares of Google, Whole Foods, and Apple. Motley Fool newsletter services have recommended buying shares of Whole Foods, Google, and Apple, and creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (8) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 23, 2012, at 2:41 PM, ramaus wrote:

    NOK up 10% today not consistent with your analysis.

    Better take a closer look. You're missing something.

    Please report back.

  • Report this Comment On August 23, 2012, at 2:59 PM, thethreestooges wrote:

    Brian only post this "sour grapes" opinion after seeing NOK jump 9%. Of couse he missed the boat and that's why the grapes are sour. There are others like him that kept posting negative articles of companies just to make sure their other holdings are going up. In Brian case, he want to make sure AAPL continue to go up more. He need to defend why AAPL won't go down after hitting its peak. They always go down once they reach their peak by the way. Yes, AAPL is my sour grapes. DUH!

  • Report this Comment On August 23, 2012, at 4:44 PM, Videnak wrote:

    Prior "crucifying" Brian here I would like to point out, that Brian likely works for the "content generating" division of Fools. These guys are not expected to understand the topics they write about, just to follow a certain guidelines how to argue with themselves. I have lately seen lot their work.

    In my opinion, it does downgrade the credibility of Fool service, lately if I see that the text is coming out of, I just skip it, because it has rarely some value apart of consolidation of public information.

    Probably no point to explain here, that mobile phone market is not just about "smart phones" but also about "stupid phones", that despite "discontinued development" Symbian is still holding its positions. That Nokia is not only phones....

  • Report this Comment On August 23, 2012, at 6:46 PM, EnigmaDude wrote:

    The comments regarding NOK seem to miss the point, which is summarized by this statement:

    "it simply doesn't have enough cash on hand to continue paying its dividend."

    A 10% move in one day does not indicate that the stock is suddenly going to take off, especially one that has lost 80% (?) of its value in the past year or two!

    Sure, the company could turn itself around, but that does not make it a good buy for the dividend, which will probably get cut or eliminated soon.

    Personally, I am tempted to speculate on NOK but not because of the dividend. And they will have to pull a rabbit out of a hat (or a new device of some kind) before the market will recognize any real value in Nokia stock.

  • Report this Comment On August 23, 2012, at 7:26 PM, thethreestooges wrote:

    If Brian is staying away from monster divident stock NOK, does he know how much divident AAPL paid so far? He stated he is long on AAPL.

  • Report this Comment On August 23, 2012, at 7:27 PM, ramaus wrote:

    EnemaDude - "A 10% move in one day does not indicate that the stock is suddenly going to take off"

    You sure are funny. Would 50% up in one day indicate anything to you? If APPL went up $65 in one day, would that mean anything to you?

  • Report this Comment On August 24, 2012, at 11:37 AM, TMFCheesehead wrote:

    Wow, lots of comments here about NOK. It's too bad that we don't come back and revisit articles after three-years, which is the minimum time-line I like to make purchases based on.

    For those wondering about NOK, there are two key lines to consider as far as why I wouldn't buy in:

    First, <<it's worth noting that I have an investing style that works for me, but may not for other people. I prefer to buy and hold companies that I'm proud to own, regardless of how they perform as investments. After that, I hope to buy at a fair price.>>

    I simply don't think NOK has shown itself to be a high quality company I'd like to invest in.

    Second, as EnigmaDude pointed out: <<it simply doesn't have enough cash on hand to continue paying its dividend.>>

    The article is about BOTH the quality of the company, AND the dividend.

    As far as investing acumen goes, I can't claim to be the greatest ever, but I do believe my CAPS score of 94, Videnak, should count for something.

    For those interested in reading further, the Fool has a great debate up on the site right now regarding NOK.

    Fool on!

    Brian Stoffel

    There's a great article

  • Report this Comment On August 24, 2012, at 11:48 AM, EnigmaDude wrote:

    ramass - thanks for the comment but NOK is not going up 50% in one day any time soon!

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