As the market starts its recovery, investors may be looking for dividend stocks to sell to lighten their portfolio.
Dividend payments from stock holdings can be an important source of income for investors. However, particularly high yielding dividends can also be a sign of financial stress or trouble at a company.
Often, companies that are losing money or whose share price is falling rapidly will offer a high dividend to attract and retain shareholders. This can be dangerous for investors, and is referred to as a “dividend value trap.” That’s the first clue that you own one of the dividend stocks to sell.
There’s no sense investing in a high yielding dividend if the company behind it is in danger of going out of business or its stock is in freefall. As is often the case, if something seems too good to be true, it likely is.
Investors need to be careful and perform proper due diligence on a company and stock before buying it. Here are three dividend stocks to sell before they become obsolete.
Western Union (WU)
Western Union (NYSE:WU) is a familiar legacy company that has fallen on hard times. This company’s business model has been transformed by technology.
Today, people can wire money to each other and businesses with the touch of a button on their smartphone. Of course, the company has been disrupted before.
Starting out as a telegraph company in 1851 during the railroad boom, Western Union shifted its business away from communications and to money wire transfers in the 1980s.
For a time, Western Union was known as the world’s largest money-transfer business. But that was before wireless internet, smartphones and various banking and payment apps came along.
Today, Western Union’s business is struggling. So too is WU stock, which has declined 42% in the past five years. Since the 2008 financial crisis, the share price has declined 60%.
The company offers a sky high dividend yield of 8.52% that equates to a quarterly payment of 23 cents a share. But don’t be fooled. Western Union’s best days are behind it.
Xerox Holdings (XRX)
Another familiar name whose best days were in the 1980s is Xerox Holdings (NASDAQ:XRX), the company whose principal business is office photocopiers.
Several technologies and trends have conspired to harm Xerox’s once successful business model. These include cloud computing storage, the proliferation of online document management companies such as DocuSign (NASDAQ:DOCU), the work from home trend, and environmental concerns about using paper.
These problems explain why XRX stock has been in freefall for years. Over the last five years, the stock of Xerox Holdings has fallen nearly 50%. Since going public back in 1983, the company’s share price has declined 20%.
It’s a sad situation that has many analysts predicting the eventual demise of Xerox. The company currently pays a generous dividend that yields 6.95% or 25 cents a share per quarter. While that might be tempting, it’s important to remember that this company’s stock has only moved in one direction. Down.
Kraft Heinz (KHC)
It’s not often you hear legendary investor Warren Buffett criticize a current holding in his stock portfolio.
However, the Oracle of Omaha has expressed buyer’s remorse regarding his $12 billion stake in food giant Kraft Heinz (NASDAQ:KHC), saying “I was wrong… we overpaid for Kraft.”
Other shareholders may have similar regrets. Eight years after Kraft Foods and H.J. Heinz Company merged, KHC stock is down 56%. The share price has decreased 35% in the last five years. Even people hoarding groceries during the pandemic didn’t help.
The company’s management team has also come under scrutiny, particularly after Kraft Heinz was forced to restate three years of financial results. Buffett and other shareholders might hold onto KHC stock for the 4% dividend yield that is worth 40 cents a share, but make no mistake, Kraft Heinz is a troubled company.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.