Please ensure Javascript is enabled for purposes of website accessibility

3 Dividend Stocks That Retirees Should Avoid

By Keith Speights - Apr 22, 2017 at 12:03PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

High dividend yields for CenturyLink, GlaxoSmithKline, and Teva look great, but there's more to the story for these stocks.

Sometimes the most tempting stocks can be some of the most dangerous.

That appears to be the case for three stocks with seemingly attractive dividend yields: CenturyLink (LUMN 2.92%), GlaxoSmithKline (GSK 2.20%), and Teva Pharmaceutical Industries (TEVA 0.91%). Here's why retirees dependent on steady income from dividends might want to stay away from these high-yield dividend stocks.

Risk ahead street sign

Image source: Getty Images.

CenturyLink: Wait for the dust to settle

CenturyLink's dividend yield of 8.54% certainly looks appealing at first glance. What's not to like about the telecommunications company stock? Unfortunately, quite a bit.

The company isn't making nearly enough profit to fund its dividend program, and that isn't just a recent phenomena. CenturyLink's dividend payments have outweighed its net income for several years. So how has the company been able to keep dividends flowing? Its free cash flow has been enough to pay out dividends.

However, both net income and free cash flow have been heading in the wrong direction lately. Those aren't trends that should give investors wanting consistent dividend payments a warm and fuzzy feeling. CenturyLink cut its dividend in 2013, when both free cash flow and net income were higher than they are now. 

It's possible that the CenturyLink's proposed merger with Level 3 Communications could help. Shareholders of both telecom companies overwhelmingly approved the deal. The synergies from the merger should boost free cash flow and reduce uncertainty about sustaining dividends at the current high levels. However, federal approval of the merger isn't a slam dunk. Retirees who count on steady dividends for income might want to avoid CenturyLink in the meantime. 

GlaxoSmithKline: Turning the corner -- but not there yet

GlaxoSmithKline has an impressive dividend yield of 4.79%. What isn't so impressive, though, is that the big drugmaker spent more than four times what it made in profits last year to pay out dividends.

Unlike CenturyLink, GlaxoSmithKline's free cash flow hasn't been sufficient to cover its dividend payments. The company has had to borrow to pay dividends to shareholders. That's obviously not a scenario that can continue indefinitely.

The company could be turning a corner, though. Sales are booming for GlaxoSmithKline's HIV drugs Tivicay and Triumeq. Several newer respiratory drugs are also performing well and helping to offset lower sales for some of the company's older drugs that face generic competition.

More good news could be on the way. GlaxoSmithKline hopes to receive regulatory approval for shingles vaccine Shingrix, autoimmune disease drug sirukumab, and COPD drug fluticasone furoate/umeclidinium/vilanterol (FF/UMEC/VI) later this year. The company also has several other candidates in its late-stage pipeline. 

Still, I suspect that there are too many variable factors with GlaxoSmithKline to make it a stock that many retirees would feel comfortable with. Other stocks have similar yields with much less uncertainty. 

Teva: Threat to top-selling drug

Another pharmaceutical stock with a seemingly attractive dividend is Teva, which currently boasts a dividend yield of 4.23%. The Israel-based drugmaker has paid a quarterly dividend since 1986. So what's the problem with Teva?

The company paid nearly $1.6 billion last year to fund its dividend, but Teva only made $311 million in net income. However, Teva's free cash flow of more than $4 billion made the situation much better. There's a legitimate concern, though, about whether or not the company will be able to sustain that solid cash flow in the future.

Teva's top-selling product is Copaxone. The multiple sclerosis drug accounted for nearly one-fifth of the company's total revenue last year. In January, a U.S. district court ruled that several key patents for Copaxone were invalid. Although Teva is appealing the decision, the potential for generic competition for the drug could mean that the company's revenue and cash flow could be in jeopardy.

If Teva prevails in the Copaxone litigation, the company could be in a reasonable position to grow earnings and keep the dividends rolling. Additionally, last year's acquisition of Actavis Generics should boost Teva's top and bottom lines. But for retirees needing to count on steady dividends, looking elsewhere is a smarter choice for now.  

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Teva Pharmaceutical Industries Limited Stock Quote
Teva Pharmaceutical Industries Limited
TEVA
$7.74 (0.91%) $0.07
GSK Stock Quote
GSK
GSK
$43.69 (2.20%) $0.94
Lumen Technologies Stock Quote
Lumen Technologies
LUMN
$11.27 (2.92%) $0.32

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
336%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.