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Danger Lurks for These 3 High-Yield Dividend Stocks

By Tim Brugger - Oct 11, 2017 at 8:38AM

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High yields are nice, but sometimes a dividend is attractive because the underlying stock has issues.

For income-seeking investors, high-yield dividend stocks are often a great solution. In addition to generating income, they often sport nice growth potential as well. However, sometimes a high yield is the result of the stock itself underperforming. The lower the stock price, the higher the payout, expressed as a percentage.

Unfortunately for existing shareholders, there are a number of high-dividend stocks today that fall into the "iffy" category. For instance: Qualcomm (QCOM 2.34%), IBM (IBM 1.11%) and General Electric (GE 1.30%). Not that these companies can't get things turned around; they may. The question is: Will they?

Blue-tint photo of statues of a bull and a bear arranged so as they are facing off against one another, with urban buildings in the background.

Image source: Getty Images.

Legal issues

As shareholders of Qualcomm know, last quarter was an eye-opening example of its ongoing legal troubles. Even if we set aside the courtroom squabble with longtime customer Apple, other legal troubles cost Qualcomm big in its fiscal third quarter.

Qualcomm wrote two large checks to settle a couple of its outstanding court-imposed fines, which had a severe impact on its earnings results. The first  was a $940 million payment to resolve a long-standing dispute with BlackBerry. That payment alone shaved $0.48 a share off Qualcomm's bottom line.

The other fine required Qualcomm to fork out $927 million to a South Korean regulatory agency, which alleged the same thing so many others have: Qualcomm's licensing fees are anticompetitive. As for the Apple dispute, it caused Qualcomm's most profitable segment, licensing revenue, to drop 42% year over year to $1.17 billion, and impacted the unit's earnings before taxes a negative 51%.

Qualcomm's 4.4% dividend yield is nice, but the company's could face increasing competition on top of its current legal troubles, making it far from a sure thing for the immediate future. 

Time to deliver the goods

IBM is on a roll, but not in a good way. Last quarter's $19.3 billion in revenue was a 5% drop year over year, marking the 21st straight quarter of total sales declines. While that got most of the headlines, more concerning was the slowing growth of IBM's strategic-imperatives revenue.

CEO Ginni Rometty has gone all-in on IBM's transition from legacy hardware to its strategic imperatives, which include the cloud, data analytics, mobile, and cybersecurity. Naturally, a transformation of that magnitude takes time, so a bump or two along the way is expected. But the meager growth in several of IBM's core segments is disconcerting, to say the least. 

Cloud sales continued to climb, rising 15% to $3.9 billion, an exemplary performance. However, analytics -- a segment in which IBM has invested billions of dollars over the last two years -- increased just 4%, as did security sales. Mobile revenue jumped 27%, but as the smallest contributor to total strategic-imperatives sales, that result was just a consolation.

Though I remain bullish on IBM, and its 4.1% dividend yield is enticing, the company has to do a lot to return to its winning ways.

Tell me it isn't so

As is the case with IBM, GE's 3.9% dividend yield isn't in serious danger, but the conglomerate's underlying results have been nothing short of disastrous for a long time. To its credit, GE shaved $1.63 billion in overhead compared to 2016's second quarter, but that wasn't nearly enough to overcome the 12% drop in revenue to $29.56 billion.

On the bottom line, things look even worse. Last quarter's $0.13 a share was a disappointing 57% decline compared to last year's $0.30 a share. And if analyst expectations are close to actual results, the current quarter will be even more depressing for shareholders. Consensus estimates are for earnings per share of $0.05, a significant decline from the $0.32 a share GE reported a year ago.

Not all is lost, however. GE's renewable energy unit  reported a 17% rise in revenue to $2.46 billion and a 5% increase to $6.97 billion from its largest division, power. It should be noted that much of the EPS hit was due to a one-time "corporate items" charge of $1.58 billion. But with GE's repeated negative results, investors should be wary as the company meanders through its personal minefield.

Tim Brugger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of Qualcomm and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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Stocks Mentioned

International Business Machines Corporation Stock Quote
International Business Machines Corporation
IBM
$134.01 (1.11%) $1.47
General Electric Company Stock Quote
General Electric Company
GE
$79.93 (1.30%) $1.03
QUALCOMM Incorporated Stock Quote
QUALCOMM Incorporated
QCOM
$151.29 (2.34%) $3.46

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