Please ensure Javascript is enabled for purposes of website accessibility

5 High-Dividend Stocks to Avoid This Fall

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Are these high yielding dividend stocks on your radar? If so, our contributors explain why you may want to rethink making an investment in them.

The current low-interest rate environment has made investors of all ages seek out income-producing stocks to add to their portfolios. But while we Fools tend to love dividend checks as much as anyone, we recognize that not all dividend stocks are created equal. It's certainly tempting to want to add a dividend stocks with a high yield to your portfolio as a way to turbo-charge your income, but companies that have high yields but deteriorating business fundamentals may actually have to cut their payouts in the future.

With that in mind, we asked a team of Motley Fool contributors to highlight a stock with a high dividend yield that they think you should avoid this fall. Read below to see if you agree with their assessment.

Dan Caplinger: With the holiday season upon us, now is a time when many investors start to look at the companies that stand to make the most from present-seeking shoppers. Yet even with the obvious holiday appeal of toys, Mattel (MAT 2.40%) is in a precarious position, and dividend investors could end up feeling like the Grinch if they're not careful.

Mattel has a dividend yield of more than 6.5%, as its stock has lost more than a quarter of its value since the beginning of the year even with its payout remaining stable. The weak performance has come from concerns about the sustainability of some of Mattel's key toy franchises, including Barbie, Fisher Price, and Hot Wheels. With competing toymakers having cashed in on lucrative multimedia entertainment franchises, Mattel has found itself without as much exposure to products based on popular movie and television characters, and that has been a huge handicap recently.

Most troubling is that Mattel's dividend payout has recently exceeded not only its reported earnings but also its free cash flow over the past 12 months. That creates the potential for a future dividend cut, which is the last thing shareholders will want to see given Mattel's struggles to keep its business growing.

Brian Feroldi: It's tough to be the Golden Arches these days. While I appreciate a company with a long history of paying a strong dividend as much as any other Fool, I can't help but think that McDonald's (MCD -0.27%) best days are behind it.  As consumers continue to look for healthier quick-serve options, the Chipotles and Panera Breads of the world will continue to eat McDonald's lunch.   

Results from the most recent quarter show this trend playing out. Same-store sales are decreasing as fewer customers find their way into the stores, causing profits to fall. While the company is trying to come up with new menu offerings in an attempt to bring in new customers, I simply think consumer tastes have changed away from traditional fast-food offerings, and the company's brand is trapped in its history of serving quick and cheap offerings.

In an effort to prop up its stock the company continues to plow money into dividend payments and share repurchase programs, and while the stock's 3.5% dividend yield might be tempting, with little to no pricing power and negative consumer trends, I can't help but see lower revenue and lower profits in the years ahead. Throw in the fact that this turnaround stock is currently trading for a pricey 22 times trailing earnings, and I believe that McDonald's stock is likely to languish for years. I'd be shocked if McDonalds decided to cut its dividend, and do not foresee that happening, but without any growth, I fail to see how this company beats the market from here and think investors should look to put their money to work elsewhere.

Selena Maranjian: When you hear Avon Products (AVP) calling these days, you might not want to open the door -- at least not the door to your portfolio. That may seem a shame, given the company's long and rich history (founded in 1886!) and its hefty dividend yield, recently topping 6%, but Avon is in trouble. 

That was made quite clear to doubters in early September, when it was reported that the company is looking into selling off a chunk of itself to private equity investors. Particularly discouraging is that it seems Avon has not been able to find a buyer for the entire company.

What's going on with Avon? Well, its top and bottom lines have been shrinking in recent years, with net profits turning into net losses. In its most recent quarter, revenue sank by 17% -- though that was pretty much due to the strong dollar and Avon's largely global operations. Its revenue is driven by its sales reps, though, and their ranks shrank by about 2% in the quarter. Revenue from North America, a key market, dropped 17% between fiscal 2013 and 2014. The company's direct-selling model isn't doing well in our current age as it did in the past, with fewer women at home to answer doorbells and place orders. The company has put a lot of hope in emerging markets such as Brazil, but those are not all delivering well.

Avon's dividend yield may be tempting, but it's a perfect example of a yield that's high not because the payout is rich but because the stock price has fallen so much. Avon's stock is down roughly 70% over the past year and has averaged losses of 32% annually over the past five years. Its yield may be high, but the dividend certainly seems in danger of being reduced or even eliminated. It has been ejected from the S&P 500, too.

Jordan Wathen: A 16% dividend yield on a stock trading for about six times earnings is about as good as it gets, but it's too good to be true. I'm talking about Medallion Financial (MFIN -3.60%), a company that specializes in financing taxi medallions, which give drivers the right to pick up taxi passengers in major cities like New York, Boston, and Chicago.

Thanks to ride-sharing services like Uber and Lyft, medallion prices are cratering across the country. In New York City, a medallion sold in August at a price of $725,000, down from $875,000 last year, and $1 million in 2013. In Chicago, transfers have come to a standstill. A Chicago medallion last sold for $150,000 in July, down from $250,000 in July 2014, and the median price of $357,000 in April 2014. Medallion prices are important because they serve as the primary collateral backing Medallion Financial's loans.
It's my view that this is only the start of medallion loan losses across the industry. Already, one New York-based lender was seized by regulators for its exposure to underperforming medallion loans. Problems are starting to pop up at Medallion Financial. Some 7% of its medallion loans on its balance sheet are now 30 days or more past due, a troubling sign for future loan losses. Most worrisome is that medallion prices have dropped without a significant increase in supply. When lenders begin to to cut their losses by selling foreclosed medallions into the market, prices could fall even further, putting more borrowers underwater. For these reasons, I think Medallion Financial is one high-yielding stock best left out of your portfolio.
Sean Williams: Dividend stocks are the glue that can hold your portfolio together during a stock market correction, but not all dividend stocks are created the same. Although high-yield dividends offer quite the allure, some can be outright dangerous. One, in particular, that I'd suggest distancing yourself from is Corrections Corp. of America (CXW 0.00%), also known as CCA.

CCA owns and operates correctional facilities around the United States (some of which it owns and others that it manages). With the United States incarcerating a considerably higher percentage of its population than other developed countries, the "gravy train" for CCA has been full for a long time. However, discussion of possible sentencing reforms, as well as the needs to curb federal spending, could come back to haunt CCA.

Specifically, discussion of reforming marijuana laws, and drug laws as whole, could cause CCA's incarcerated population to fall. Although the federal government seems unlikely to budge in its stance on marijuana anytime soon, states such as Louisiana have begun to adjust their laws on marijuana offenses down a notch. 

Additionally, the federal government has to find ways to cut its ongoing federal deficit. This isn't to say that prisons aren't needed, so much as it's a stark reminder that cost cuts are going to be made. New prison contracts could be an area where lawmakers look to clip expenses. 

With its EPS projected to slowly decline in the coming years, I suspect CCA's dividend, which is currently yielding nearly 7%, may be headed for a haircut.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

McDonald's Corporation Stock Quote
McDonald's Corporation
$252.29 (-0.27%) $0.67
Avon Products, Inc. Stock Quote
Avon Products, Inc.
Mattel, Inc. Stock Quote
Mattel, Inc.
$22.61 (2.40%) $0.53
CoreCivic, Inc. Stock Quote
CoreCivic, Inc.
$11.14 (0.00%) $0.00
Medallion Financial Corp. Stock Quote
Medallion Financial Corp.
$6.15 (-3.60%) $0.23

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/06/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.