August’s Top 3 Dividend Stocks Are Scary

Dividends are red hot right now. Coming out of the financial crisis, many investors have looked to big yields as a potential "safe haven" investment that allows them to collect a little extra passive income quarter after quarter.

But a lot of dividend stocks can be range-trading snooze fests, with just about all of your return coming from their yield alone. Microsoft (Nasdaq: MSFT), one of the rare tech dividends, and a company that seems perpetually cheap, has traded between $25 a share and $30 a share for a decade, and achieved half the return of the Dow Jones Industrials Average (INDEX: ^DJI) over the same period. Not only that, but the Dow still has a better yield than Mr. Softy.

The real goal is finding dividend stocks that not only pay you, but have robust appreciation, as well.

To track down some of these dividend all-stars, I ran a screen of U.S. traded companies with a market cap over $1 billion, which sported a dividend yield over 3%, and ranked them by their total one-month return. 

The results were surprising

Source: S&P Capitaliq

This is a dangerous ranking to view in isolation. Frontier communication actually cut their dividend back in February, thus invalidating one of the biggest reasons to go dividend fishing -- their consistent payouts. While it may have been a necessary move, considering that payouts had been well in excess of 100% for years, I’m still not biting. Total revenue declined nearly 5% compared to a year ago, the company’s BEST performance since the Verizon spinoff in 2010. While Frontier may be one of the better operators in the landline telecom space, it’s a quickly dying sector and, even the strongest swimmers can only fight the tide for so long. I do not recommend buying Frontier Communications today.

Nokia is a company I’ve been very bearish on for some time. While they hung on to some ever-precious cash this quarter, the Lumia sales have failed to make the splash they expected. This device was heralded as the savior of the company, and now sells for less than half of Apple’s iPhone 4 devices. Revenue retracted almost 20% for the quarter, and the company’s Symbian platform continues to (unsuccessfully) fight for market share scraps. I’m not sold on the decision by Stephen Elop and several Nokia board members to purchase more than 1 million shares of company stock. The move seems like a transparent attempt to indicate confidence instead of a truly strategic purchase. Taking one big step back shows that this company is still down 56% for the year and continues to loose traction in every aspect of the mobile race. Don’t buy the pop; Nokia is still junk.

Lexmark is a bit more interesting. The bit catalyst for their month-to-date surge was the announcement that they’d finally be exiting the inkjet business. While the razor and blade model of the inkjet business sounds appealing, it’s a sector that almost contracted 13% in the second quarter, according to IDC, and has never been Lexmark’s bread and butter. The company will, instead, focus on imaging and software products, and continue to sell laser printers, which should increasingly gain market share as the overall price point decreases. Lexmark has been an attractive value stock on my radar for some time, and now they’ve finally shed the ball and chain that was keeping them cheap. I like the move, and many are even starting to discuss the company as a buyout target.

Even despite a big pop in August, investors need to remain cautious on all three of these stocks. One month does not spell long-term success for any company, and all three of these dividends are still down big year to date.

LXK data by YCharts

Instead, income seekers need to strike a balance between a company with a great dividend, and great growth prospects. You can uncover some of our analysts' top picks to fit this bill in our premium report: Secure Your Future With 9 Rock-Solid Dividend Stocks. It’s totally free today, so click here to read more now.