Investors love dividend stocks, and for many people, the higher the yield, the better the stock. But in reality, there are many high-yielding stocks that are dangerous, especially for retirees -- and those who have shorter time horizons should be especially careful about relying on them for the income they depend on to make ends meet in retirement.
To help you identify some of the danger points out there, we asked three Motley Fool contributors to give their warnings about some popular high-yielding dividend stocks. Take a look at their choices and see if you agree with their concerns, too.
Bob Ciura: Russian media company CTC Media (UNKNOWN:CTCM.DL) is one of the highest-yielding stocks in the consumer sector. CTC Media currently pays a $0.70 per-share dividend. At its recent $4 per share stock price, that results in a whopping 17% dividend yield. At first glance, this might entice income investors such as retirees, who may be starved for yield in this low interest rate environment.
However, the old investing adage, "don't chase yield" is the best advice when it comes to CTC Media. The company's sky-high yield is not due to dividend growth, but rather a collapsing stock price. Since price and yield are inversely related, yield goes up when price goes down. CTC Media stock price is down 57% in the past year, which has sent its dividend yield soaring.
This should send up a red flag. CTC Media's stock price is collapsing because its fundamentals are deteriorating rapidly. Operating revenue fell 30% in the fourth quarter primarily because of the collapse of the Russian ruble. Because of this, earnings fell to $0.69 per share in 2014, which was not enough to cover its dividend.
CTC Media's dividend is at high risk of being slashed to save the company much-needed cash. Because of this, retirees should avoid this volatile stock pick.
Tim Green: A few years ago, toy maker Mattel (NASDAQ:MAT) would have seemed like a no-brainer for a dividend-focused retirement portfolio. The company was the largest toy maker in the world, owning time-tested brands like Barbie, Fisher Price, and Hot Wheels. Coming out of the recession, earnings grew relentlessly, allowing the company to grow the dividend substantially each year.
But things have taken a turn for the worse. The company's brands have started to perform poorly: During 2014, Barbie sales slumped 16%, Fisher Price sales fell 13%, and total sales declined by 7%. The company's earnings and stock price have collapsed, and while the current dividend yield, in excess of 6.5%, may look enticing, Mattel no longer has sufficient earnings to cover the dividend payment.
The threat of a dividend cut is very real at Mattel, and if earnings continue to deteriorate, the company will need to scale back the dividend in order to make the investments necessary to turn around its business. Mattel is certainly capable of making a comeback, and for investors with a long time horizon, the stock could be a good investment. But for retirees relying on a stable stream of dividend payments, Mattel is far too risky to consider.
Dan Caplinger: For years, Philip Morris International (NYSE:PM) has been a dividend stalwart, finding ways to boost its payout and continuing in the footsteps of its former parent, Altria. With a yield above 5%, Philip Morris certainly maintains its tobacco-industry tradition of producing lucrative streams of income for its shareholders.
Lately, though, Philip Morris has faced a host of problems that could pose a long-term threat to its business. On one hand, the strong U.S. dollar has put a lot of currency-related pressure on Philip Morris International's earnings power, and even with the Fed having said it might be slower in raising interest rates than anticipated, currency traders still see dollar strength as likely to persist.
At the same time, Philip Morris is dealing with more hostility among foreign governments toward its products, with the U.K. being the latest to pass legislation to force cigarette sellers to strip marketing images from their packs in favor of uniform, drab designs. Philip Morris plans to challenge hostile laws and assert its rights, but retirees can't afford to take chances as the company's dividend payout ratio remains at high levels. Philip Morris has recovered from similar problems in the past and could do so again, but the risk is higher than most retirement investors should take on.