As the markets continue to surge in the wake of the Federal Reserve’s recent interest rate decision, it may be an opportune time to purge any underperforming dividend stocks from your portfolio.
Despite the overall strong performance of stocks, company-specific factors can lead to disappointing or even negative returns, particularly with high-yield but low-quality dividend stocks.
These stocks generally fall into two categories: those with a high risk of dividend cuts and those that are simply poor investment opportunities. Many in the first category have already slashed their payouts, while many in the second category risk price declines that could overshadow their high payouts. Let’s delve into some of the worst dividend stocks currently on the market and why they should be avoided.
Over the past two years, Big 5 Sporting Goods (NASDAQ:BGFV) has seen a significant contraction in revenue and profitability. This has resulted in a substantial decline in the specialty retailer’s shares and a significant reduction in its dividend payouts. As CEO Steven Miller noted in Big 5’s latest earnings release, soft consumer demand is “likely to persist” during the current fiscal quarter, which could lead to further reductions or even suspensions of payouts.
B&G Foods (NYSE:BGS) may appear to be a fantastic low-priced, high-yield stock at first glance. However, as Louis Navellier and the InvestorPlace Research Staff highlighted last month, B&G shares have performed poorly in recent years, and the company has significantly cut its quarterly dividend. Despite efforts to strengthen its balance sheet, declining revenue and earnings could outweigh any gains from the dividend.
FAT Brands (NASDAQ:FAT) is another stock to avoid. I’ve previously argued against investing in this restaurant franchising company due to debt-financed dividends, management scandals, and other red flags. With earnings forecasts predicting net losses through 2024, FAT may soon reach a point where it can’t even raise cash via debt issuance to maintain its payout rate.
Guess? (NYSE:GES) may seem appealing as a dividend stock with a forward annual yield of 5.07%. However, GES stock is more of a value-trap than a deep value play. Even with the market anticipating a recovery in consumer demand, analyst forecasts predict only a slight increase in the company’s earnings next fiscal year.
Icahn Enterprises (NASDAQ:IEP), a master-limited partnership that serves as billionaire activist investor Carl Icahn’s publicly traded investment vehicle, is another stock to avoid. Despite sporting a yield of 25.5%, IEP stock has a high-yield for a reason, and it’s not a good one. After cutting its quarterly distributions, Icahn may decide to reduce it further, making IEP a risky investment.
Kronos Worldwide (NYSE:KRO), a chemicals company, has a forward annual dividend yield of 8% and has rallied strongly since October. However, as my InvestorPlace colleague Marc Guberti pointed out in November, dividend cut risk runs high with KRO stock. If results do not improve, the stock could suffer from disappointing results and maybe a dividend reduction.
Finally, Medifast (NYSE:MED), a weight loss products company, is another stock to avoid. The rise of prescription weight-loss treatments is causing a disruption in Medifast’s business, leading to a decline in its revenue/earnings. The company’s 9.39% dividend yield could also be reduced or even suspended. Until new developments emerge suggesting that the company can adapt to changing weight loss habits, it’s best to steer clear of MED stock.
Let us know what you think, please share your thoughts in the comments below.
