Dividend stocks are the foundation upon which great retirement portfolios are often built. Including 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.
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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 spring.
Frontier Communications
If it looks too good to be true, it usually is! That's the lesson to be learned from telecom and content services provider Frontier Communications (FTR +0.00%), which is currently sporting a 21.6% dividend yield. If this payout were to somehow hold, investors would be able to double their money, including dividend reinvestment, in less than four years. But the chance of this dividend holding without a cut seems increasingly small, which is why this high-yield dividend stock is to be avoided this spring.
Frontier's problems essentially boil down to the multiple instances where it purchased landline assets from Verizon. Frontier had a decent plan on paper when it acquired these landline assets: landline margins were high, and the company anticipated that it would be able to convert a number of these landline customers into broadband consumers through bundled deals. Unfortunately, that's not how things have worked out.
To begin with, wireless access has expanded nationally to include more rural communities that were previously not covered. This has reduced the need for consumers to have landlines in their household. Frontier has seen a steady bleed to its landline customers since it made its initial Verizon wireline asset acquisition back in 2010. Between Q3 2016 and Q4 2016, Frontier lost more than 100,000 wireline customers, and its average monthly revenue per residential user fell by $2.01.
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Likewise, the rise of streaming content platforms has made the need to bundle in order to save money somewhat obsolete. Broadband subscribers fell by 91,000 to 4.27 million in Q4 2016 from the sequential third quarter. In other words, Frontier's business model is slowly dying.
While its cash flow may appear sufficient to cover its lucrative dividend, the tipping point may come sooner than even Wall Street has forecast. This is a high-yield dividend stock worth avoiding.
Barnes & Noble
Another high-yield dividend stock to consider avoiding at all costs this spring is the nation's largest brick-and-mortar bookseller, Barnes & Noble (BKS +0.00%). Currently paying $0.15 per quarter, Barnes & Noble is yielding a healthy 6.6%, or more than three times the average yield of the S&P 500.
However, it doesn't take a rocket scientist to figure out that Barnes & Noble is in serious trouble, as are many physical retailers. The rise of e-commerce is stinging brick-and-mortar retailers hard, and companies like Amazon.com (AMZN 0.81%) are eating them for breakfast!
A quick look at Wall Street's longer-term sales projections tells us everything we need to know. After generating $4.2 billion in sales last year, marking its fourth consecutive year of declining sales, Wall Street has projected another four consecutive years of sales declines coming up. By 2020, Barnes & Noble is estimated to only be generating $3.5 billion in annual sales. In the company's third-quarter report, it called for a disappointing 7% slide in same-store sales this year.
Image source: Barnes & Noble.
Considering that Amazon doesn't need to have a physical store presence (even though it recently announced that it'll open a handful of physical bookstores), it operates with substantially lower overhead costs than brick-and-mortar stores like Barnes & Noble. It also has cash flow coming in from so many different channels (cloud and marketplace) that it can operate with lower margins than Barnes & Noble. The only response from Barnes & Noble has been to cut costs in an effort to maintain its margins, but closing underperforming stores isn't exactly a long-term strategy. It's akin to putting a Band-Aid on a large wound.
Like Frontier, Barnes & Noble has the cash flow at the moment to continue paying a healthy dividend, but its payout ratio is well over 100%, and its business is slowly decaying. With no true catalysts, this remains a high-yield dividend stock you'll want to steer clear of.
Nordic American Tankers
Finally, income seekers would be wise to ignore what looks like a delectable 14% trailing dividend yield, and 9.8% forward yield, on Nordic American Tankers (NAT +1.48%). At its forward yield of nearly 10%, investors could double their money in a little more than seven years on the payout alone. But that's if it holds -- and I strongly believe it won't.
Nordic American Tankers operated a fleet of 30 Suezmax crude oil tankers as of the beginning of the year, though an expansion was announced in February that'll increase its fleet to 33 Suezmax vessels. The company firmly believes that expansion of its fleet is imperative to its long-term growth prospects.
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But therein lies the issue: Nordic American Tankers is entirely reliant on Suezmax vessels. While most shipping companies offer a variety of shipping vessels and commodity targets, Nordic American Tanker has but a single ship type, the Suezmax, leaving it exceptionally vulnerable if oil prices dip or daily charter rates drop.
Additionally, Nordic American Tankers has gone to the opposite end of the spectrum of most of its peers and focused on relatively nimble short-term contracts. Though this gives the company added flexibility if spot shipping rates rise, it also leaves the company particularly exposed to the spot market for shipping rates and even crude oil pricing.
This year, Wall Street is projecting that Nordic American Tankers will generate $0.94 in cash flow per share, but its forward yield predicts $0.80 per share in aggregate payouts. This doesn't seem doable with new vessels being added to the fleet, crude prices stalled, and Nordic American carrying more than $440 million in debt.
If you're looking for a high-yield stock primed for a dividend cut this spring, Nordic American Tankers just might be your stock.
