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3 Awful Stocks for Retirees

By Brian Stoffel – Feb 21, 2016 at 7:21AM

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Big dividends might be tempting, but these stocks will only add stress to your Golden Years.

Don't put yourself in a bad financial situation by buying these stocks. Photo: Alex Proimos, via Wikimedia Commons.

Every retiree wants to fully live out their Golden Years. Doing so involves a lot of stuff that doesn't concern money at all -- like spending time with family and friends.

But at least part of the equation involves finances, and retirees have a delicate balancing act. They would like to make sure their nest eggs are around as long as they're alive, but they also want to be able to pull enough out to meet their basic needs.

Sometimes -- especially when retirees invest significant portions of their money in individual stocks -- disaster can hit. Simply put: there are a handful of stocks that don't belong anywhere near a retirement portfolio.

In fact, there are so many stocks that meet this description that an article including all of them would be far too long. Instead, I focused on three that met two simple criteria. First, each needed over 1,000 ratings on Motley Fool's CAPS system to ensure that it is a widely followed stock. Second, it needed to offer a dividend, as dividend-paying stocks are often very popular with retirees.

Here are the three that I think you should avoid...

Abercrombie & Fitch (ANF 2.06%)
This clothing retailer made a name for itself in the late 1990s and early aughts. But what was once on the cutting-edge of risqué fashion has now fallen woefully out of favor. The man who made ANF what it was, former CEO Mike Jeffries, epitomized this out-of-touch-ness when, in 2006, he said the brand was only, "for the cool kids."

Take a look at how comparable-store sales have fared for the company since 2010 to get an idea for what I'm talking about.

Despite this, the stock currently trades for 21 times non-GAAP earnings -- a very expensive pricetag for a company that is still bleeding sales within its brick-and-mortar locations.

Of further concern is the company's dividend. It currently yields 3.2%, and that dividend is actually fairly healthy, as only 27% of free cash flow is used to pay out the dividend. But the cash distributed per share has been frozen for the past three years. And before it got a bump in early 2013, the company's previous payout held steady for over seven years.

While those might have been wise moves for the company, retirees should favor companies with steady and healthy increases. Combined with its stagnant business, retirees should stay away from Abercrombie.

GameStop (GME -1.52%)
Retirees probably don't understand it, but if they pay any attention to what their grandchildren are up to, they should know that "gaming" is big business. In its heyday, GameStop was king of the gaming business, providing all a young adult could want.

But times change, and so has the industry. Brick-and-mortar locations that offer console systems and physical games have given way to virtual games that take place online -- no console, or physical game, needed. That's spelled trouble for GameStop. Like ANF, the company saw comps dip -- though they've since recovered.

So does this recovery mean that GameStop, with its 5.3% dividend, is a buy? Not necessarily.

Though the company has tried to diversify its revenue streams by venturing into -- of all things -- wireless communications, sales of games and consoles still make up the bulk of GameStop's revenue. Though recent trends have been positive, video game makers are transitioning to mobile platforms as fast as possible. This is, perhaps, part of the reason why comps actually fell by 1% heading into the holiday season.

The company has actually used its dividend to assuage investor fears. Though it's only been paid since 2012, GameStop's dividend has grown by an astounding 34% per year. And it's actually quite healthy, as payouts only eat up 34% of the company's free cash flow.

But don't be fooled. There's a reason shares are trading for just 8 times earnings: unless management can find a sustainable business line in the face of significant headwinds, the stock -- and its dividend -- will be in for a slow death.

Frontier Communications (FTR)
The last member of the list has the juiciest dividend of them all -- currently yielding 9.9%. But don't be (small f) fooled, there's a lot of concerns with this company.

For starters, until recently, Frontier was primarily focused on providing landline telephony in rural areas. You shouldn't need a primer on why that's a dying business. The company expanded last year by buying wireless properties from AT&T in Connecticut, but ran into many execution problems. It is about to close a deal that will double its customer size by buying Verizon's wireline, broadband, video, and FiOS properties in Texas, California, and Florida.

The deal might end up helping Frontier, but retirees should approach with extreme caution. There's a reason, after all, that Verizon was willing to part ways with these holdings. And Frontier had to pay a pretty penny -- almost $11 billion -- to get Verizon to sign off.

Of more immediate concern, Frontier paid out $500 million in dividends over the last twelve months, while collecting only $470 million in FCF. Either the Verizon deal needs to boost FCF immediately, or the dividend could be headed for a cut -- which has already happened twice in the last ten years.

Brian Stoffel has no position in any stocks mentioned. The Motley Fool recommends Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Frontier Communications Stock Quote
Frontier Communications
GameStop Corp. Stock Quote
GameStop Corp.
$25.99 (-1.52%) $0.40
Abercrombie & Fitch Stock Quote
Abercrombie & Fitch
$16.38 (2.06%) $0.33
Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
$37.84 (-2.34%) $0.91
AT&T Inc. Stock Quote
AT&T Inc.
$15.32 (-2.12%) $0.33

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

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