When it comes to investing, there's no more direct route to sharing in corporate profits than by buying dividend-paying stocks. But not all dividend-paying stocks are created equal. Below, I'll detail three companies with monster dividends that I'm staying away from.
Company | Industry | Yield | Earnings Payout Ratio | Free Cash Flow Payout Ratio |
|---|---|---|---|---|
| Roundy's | Groceries | 9% | 19% | N/A |
| Frontier | Communications | 8.8% | 523% | 85% |
| Nokia | Electronics | 6.6% | N/M | N/M |
Source: Yahoo! Finance, SEC filings. N/M = not meaningful because of negative earnings and free cash flow. N/A = not available because of incomplete historical information.
Before going any further, it's worth noting that I have an investing style that works for me, but may not for other people. I prefer to buy and hold companies that I'm proud to own, regardless of how they perform as investments. After that, I hope to buy at a fair price.
A grocer selling out
Roundy's runs several chains of grocery stores in the Midwest, primarily in my native Wisconsin. There are a couple of things to worry about, here.
First and foremost is the fact that the company's chains of Pick n' Save, Copps, and Rainbow stores aren't particularly distinctive. Surely, they have a dominant market share right now, but they are ripe for disruption by the likes of Whole Foods
It's a little too early to get a good feel for how safe Roundy's is, primarily because it just went public. Its reasons for going public, however, should give investors pause. The company's owners were ready to get out of the business, but couldn't find anyone willing to buy them out, so they just did an IPO.
Not exploring any new frontiers
In June 2011, Fool analyst Jim Royal put together his "World's Greatest Dividend Portfolio," and Frontier made the list. Though the company has seen an uptick in recent weeks, spurred by insider buying, Jim isn't so hopeful anymore, saying he expects to unload shares when they hit what he sees as their fair price.
The company, which provides Internet and telephone services for rural America, hasn't been heading in the direction investors have hoped for. The company's acquisition of Verizon's rural business put it on the map, but Frontier executives may now be getting a taste for why Verizon was willing to part ways with those accounts in the first place.
As it stands, Frontier is using most of its free cash flow to pay its outsized dividend, and any reduction in the core business will likely lead to a shrinking or suspended dividend.
From first to worst in no time flat
Nokia and fellow communications company Research In Motion have been steamrolled in the smartphone revolution. While Samsung is selling lots of phones, Apple's
Sure, emerging market numbers and rumors of a new smartphone have helped push the stock higher lately, but let's look at the facts. Nokia has a decreasing market share, and it simply doesn't have enough cash on hand to continue paying its dividend. Furthermore, the company just can't seem to define itself against its superior competition.
Learn more
Not everyone's convinced that Frontier Communications can't turn things around. Find out what analyst Dan Caplinger thinks in his premium report on the company that comes with exclusive access to real-time updates throughout the year. You can also get more information about Apple and Whole Foods in similar reports from top Fool analysts. Click on the links to get your copy today.
