Most investors can't deny the appeal of a solid dividend stock, but retirees have a particular affinity for them. And that's for good reason. Dividend stocks tend to be more stable and reliable, and also provide actual income, which is a crucial consideration when investing in retirement.
However, not every dividend stock is a good fit for retirees. In fact, our contributors believe investors should avoid Vector Group (NYSE:VGR), Cal-Maine Foods (NASDAQ:CALM), and McDonald's (NYSE:MCD) in their retirement period. Read on to learn why retirees should carefully consider investing in other companies.
Brian Stoffel (Vector Group): When retirees see the 7.3% dividend yield that Vector Group offers, I wouldn't blame them for getting excited. After all, while cigarette companies often face the threat of lawsuits, they have shown to be one of the best investments over the long run. Why wouldn't Vector, the owner of many ultra-low-cost cigarette brands, be one of them?
But here’s why you shouldn’t fall in love with this high yielder. For starters, the company’s payout is simply unsustainable. Over the past twelve months, Vector has paid out $182 million in dividends. At the same time, it only produced $134 million in free cash flow. The company is literally paying out in dividends more than it brings in.
Second, and related to this, Vector has started a side business in New York City real estate -- through its stake in Douglas Elliman Real Estate -- to compensate for this shortfall. While there's no telling whether this will be a good move for Vector, retirees who think they're just buying a cigarette maker wouldn't understand the full breadth of what they're putting their money behind. But here's why you really shouldn't fall in love with this high yielder: the payout is simply unsustainable. Over the past 12 months, Vector has paid out $182 million in dividends. At the same time, it only produced $134 million in free cash flow. The company is literally paying more out in dividends than it brings in.
Dan Caplinger (Cal-Maine Foods): Sometimes, dividend stocks can be perfectly good investments that still don't meet the needs of certain retirees. Egg producer Cal-Maine Foods is a great example of this: Even though the company is a solid, stable business with a reputation for returning capital to shareholders, its dividend policy doesn't fit well with every retiree's needs.
Specifically, Cal-Maine differs from most companies in that rather than committing to a set quarterly dividend payment, the egg producer ties its payout each quarter to its earnings level under generally accepted accounting principles, with investors receiving one-third of GAAP earnings. If Cal-Maine loses money in one quarter, it has to make that money back in subsequent quarters before it will pay a dividend again.
To be fair, Cal-Maine's policy has resulted in much larger payouts than the company made prior to adopting it in 2007. Yet, as you'd imagine, dividend amounts can vary widely from quarter to quarter. Last quarter's $0.252 per share payout was relatively generous, equating to a dividend yield of nearly 2% based on the stock's current pricing. But in the previous quarter, investors got only $0.191 per share. As recently as the fourth quarter of 2013, shareholders got nothing at all.
For many investors, dividend volatility doesn't disqualify a stock from being a good investment. For income-hungry retirees, though, not having a reliable payout is a risk you might not want to take.
Andres Cardenal (McDonald's): McDonald's has faced considerable challenges lately, especially as consumers are clearly more inclined toward healthier and more natural choices in the fast-food restaurant category. And as health-conscious, fast-casual competitors, like Chipotle, profit from consumers' changing tastes, these trends are hurting sales at the Golden Arches.
The company announced a 0.3% decline in global comparable sales for May, mostly driven by a decrease of 2.2% in the U.S. and a 3.2% fall in the APMEA region. This was not an isolated event: McDonald's has faced significant difficulties since 2013, and management has not proven that it has a viable and effective plan for a turnaround.
The company intends to improve both the menu and the service via a series of initiatives, such as kiosk ordering, premium burgers, and more options for menu customization. McDonald's also plans to refranchise 3,500 restaurants by the end of 2018 and deliver $300 million in cost savings by the end of 2017. It's good to see management trying to run a tight ship, but it won't be easy for the company to improve sales and cut costs at the same time.
The dividend yield looks quite tasty at 3.6%, and McDonald's has a solid trajectory of dividend growth, with 38 consecutive years of consistent payout increases under its belt. However, I would still stay away from the fast-food giant until -- or unless -- management proves that it can reverse the decline in sales.