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 1.09%) 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 +0.17%) 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 +0.00%) 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 (TAXI +0.64%), 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.
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.
