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Dividend stocks are the foundation upon which great retirement portfolios are often built. Inclusive of dividend reinvestment, investors have enjoyed an average return of approximately 7% per year by staying invested in high-quality, dividend-paying stocks over the long run.
Dividends offer a number of key advantages for investors -- the most obvious is that they can help hedge against inevitable stock market corrections. However, dividends also act as a beacon to attract investors to high-quality companies. A company would more than likely not issue a quarterly dividend and share a percentage of its profits with investors if it didn't believe those profits were sustainable, or could grow, over the long-term. Lastly, dividends can be reinvested back into more shares of dividend stock, thus leading to a process known as compounding where you wind up with successively more shares of stock and bigger dividend payouts in a repeating cycle.
Unfortunately, it takes more than a dart throw to snag a great dividend stock. Some dividend stocks are like wolves in sheep's clothing, and could wind up suckering unsuspecting income investors into potentially bad investments. Remember, yield is a function of stock price, meaning that a company with a struggling or failing business model and a declining stock price can have a growing yield that could, on the surface, look attractive.
With this in mind, here are three high-yield dividend stocks that you'd be best off avoiding this winter.
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StoneMor Partners LP
On the surface, StoneMor Partners (STON +0.00%), which runs more than 100 cemeteries and a number of funeral homes, should have a long-term, viable business model. Mortality rates are somewhat predictable, meaning the company should be able to somewhat accurately predict its costs and cash flow to maximize its dividend and profitability. Plus, as a limited partnership StoneMor is able to enjoy certain tax benefits. The company's exceptionally high 12.3% yield is an indication of these tax benefits.
However, investors learned in 2016 that StoneMor is far from untouchable. In October, StoneMor announced that it was slashing its dividend by 50% from $0.66 to $0.33 per quarter to take into account a number of near-term issues.
To begin with, StoneMor announced the need to replace a sizable percentage of its salesforce, noting that it had hired a recruiting firm to help rebuild its staff. The fact that StoneMor needs outside assistance to replenish its workforce, and that it'll likely take time to get its salesforce trained and on the same page, probably means a multiple quarter issue for StoneMor. This suggests 2017 may not offer any improvement in StoneMor's underlying results.
The other major issue is that we're seeing a trend toward higher rates of cremation and fewer traditional cemetery plot burials. StoneMor's margins are considerably higher when it sells cemetery plots as opposed to handles cremations.
Perhaps the death blow (pun intended) is that CEO Larry Miller isn't even sure if a 50% cut in the company's dividend is sufficient in terms of cash conservation during these tough times. Miller noted in the company's October dividend cut press release that he and his management team would need to assess the state of the business in the months ahead to determine if $0.33 per quarter is the appropriate payout. In other words, another dividend cut could be possible. StoneMor is a high-yield dividend stock worth avoiding this winter.
Image source: Staples.
Staples, Inc.
Having bounced more than 25% off of its 52-week low, office supply superstore Staples (SPLS +0.00%) is a repeat offender. Staples made the list of high-yield dividend stocks to avoid this past fall as well.
On the plus side, Staples remains healthfully profitable with its core business, and it still has levers that it can pull to keep its costs under control. For example, Staples had plans to close 50 of its stores during 2016, and it remained on track to meet that mark as of its third-quarter update. Reducing its costs should allow Staples to maintain its margins, and perhaps even its payout, if its revenue slides.
Unfortunately, cost-cutting isn't a growth strategy, and Staples appears to be in deep trouble over the long run. The biggest issue is that Staples is being eaten alive by internet competition. Companies like Amazon.con have much lower overhead since they don't have physical brick-and-mortar stores, and they can thus offer a much larger and diverse inventory. More importantly, companies like Amazon can undercut Staples on its in-store prices. What's happened is that Staples has lost some of its core small business clientele, and it could be impossible to win them back, especially with Staples' store size on the decline.
What's more, even with Staples investing in its e-commerce business, it's still being left in the dust by other e-commerce competitors. Comparable-store sales in the third quarter fell by 4% for its brick-and-mortar stores, and they actually dipped by 1% for Staples.com. Staples is one of very, very few brand-name companies where e-commerce sales are on the decline, and that's not a good sign.
Put plainly, Staples is running out of options. Regulators blocked its merger with rival Office Depot, which would have given it some semblance of pricing power, meaning its only option is to cut its costs and hope its e-commerce business picks up. It's a risky strategy that makes its 5.2% dividend yield forgettable.
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Abercrombie & Fitch Co.
The final high-yield dividend stock I'd strongly suggest income investors avoid this winter is teen-based retailer Abercrombie & Fitch (ANF 2.63%). Despite sporting a brand-name product that teens have sought after for a long time, this 7% dividend yield could be poised for a cut in 2017.
Abercrombie & Fitch's third-quarter results tell the tale, with comparable-store sales declining by 6%, with Hollister sales flat and its A&F brand same-store sales dropping by 14% in the United States. Things weren't much better internationally, where comparable-store sales fell 10% for the quarter across all brands. If there was a silver lining, the company's e-commerce channel grew, and it remained disciplined with its spending. However, there remains clear and ongoing weakness with the A&F brand that doesn't look as if it'll resolve anytime soon.
Arguably the biggest problem for Abercrombie & Fitch to overcome is it no longer sits in a prime niche with teens and consumers. A&F is known for its substantially higher price points, which means teen-based retailers like American Eagle Outfitters have slid in to fill the gap. American Eagle Outfitters offers teens the opportunity to wear branded apparel for a lower cost than A&F, and it's much easier on parents' wallets. Until the third quarter, U.S. GDP growth had also been subpar, giving consumers more incentive to hang onto their disposable cash as opposed to spending it.
What's somewhat worrisome is that in spite of Abercrombie & Fitch's aggressive innovations and marketing tactics, it's still recognizing negative traffic patterns with its A&F channel. Without question, this is a tough retail environment, and it's probably not going to get better anytime soon for Abercrombie & Fitch, giving investors every reason to avoid this stock this winter.
