Sometimes trying to earn high returns through high-yield stocks can be like trying to pick up pennies in front of a steamroller, and that’s the situation here with many of the dividend stocks to sell.
Sure, in the near-term you are collecting a large, steady return from such investments. However, the elevated risk of capital losses far outweigh this upside. Outsized capital losses can arise, in two ways.
First, many of the high-yield dividend stocks are priced as such, because of the increased risk of a dividend cut/suspension. An announcement of a cut/suspension can drive shares down.
Second, poor operating performance can also lead to unrealized capital losses that far exceed dividend payouts. Deteriorating fundamentals can lead to a market de-rating, both in line with decreases in its underlying value, along with the increased risk of its dividend being reduced/eliminated in the future.
So, what are some prime examples of dividend stocks to sell for this reason? These seven are well within this category.
Big Five Sporting Goods (BGFV)
Big Five Sporting Goods (NASDAQ:BGFV) last year cut its quarterly dividend by 50%, but with shares in the sporting goods retailer declining sharply, even with this reduced rate of payout, this remains a high-yield dividend stock (forward yield of 9.16%).
However, I wouldn’t assume that the stock’s reduced rate of payout is sustainable.
Big Five won’t announce its full-year 2023 earnings until later this month, but it has already unveiled preliminary results. These show a double-digit decline in sales, and a net loss of up to 32 cents per share. Mostly, due to expected big losses during Q4 2023.
With great uncertainty over how long (and to what extent) this operational slump continues, consider it best to err on the side of caution with BGFV stock. Assume that another dividend cut is forthcoming, which could drive the next big round of declines for shares.
FAT Brands (FAT)
FAT Brands (NASDAQ:FAT) is a name I’ve previously called out as one of the top dividend stocks to sell. Most recently, back in December. Opposing views profited.
During this time frame, FAT stock surged from around $6.50 per share, to at one point prices nearing $9.50 per share.
One could chalk this up to bullish headlines, such as a supposed scoop from an Axios reporter, about the restaurant company’s plans to take some of its chains public as a separate entity.
That said, more recently, FAT has since dipped back to around $8 per share. While not certain, it’s possible that the market is remembering again that this company has many red flags, including a 6.13% dividend that’s likely unsustainable, considering FAT Brands’ continued net losses.
Global Net Lease (GNL)
With a forward yield of 17.57%, Global Net Lease (NYSE:GNL) may seem too tempting to pass up. After all, while shares in this real estate investment trust have experienced a multi-year price decline, surely the stock has finally bottomed out, right? Not so fast!
As a Seeking Alpha commentator argued last month, GNL stock may trade at a big discount to its assessed net asset value ($7.75 versus $14.46 per share), but this net asset value may be inflated.
The current market value of its property portfolio, especially its portfolio of single-tenant office properties, may be far below this figure.
Even if GNL’s high dividend stays as-is, further price declines may outweigh them. Continued uncertainty about the state of the commercial real estate market, and the further deterioration of the underlying value of Global Net Lease’s portfolio, may keep putting pressure on shares.
Kohl’s (KSS)
High risk of a dividend cut is what may make Kohl’s (NYSE:KSS) one of the dividend stocks to sell. At least, that’s the view of Wolfe Research’s Chris Senyek.
Last month, the analyst included the department store chain’s shares, on a list of top well-known stocks with the highest dividend cut risk.
It’s not surprising that KSS stock made the list. Per Senyek’s calculations, Kohl’s will spend 78% of its free cash flow to sustain its 50 cent quarterly dividend (a payout that gives KSS a forward yield of 7.26%).
This may be cutting it a bit thin. In the event of negative surprises, such as a recession, cash flow could come below current expectations.
Kohl’s is no stranger to dividend cuts. KSS suspended its dividend during the Covid lockdown period, and the current dividend is below that of the stock’s pre-Covid dividend rate (70.4 cents quarterly).
3M (MMM)
As I discussed recently, 3M (NYSE:MMM) has put two headline-making lawsuits behind it, but that doesn’t make the industrial conglomerate’s hard-hit shares a buying opportunity. A key reason to avoid this stock is its elevated dividend cut risk.
MMM stock currently has a forward dividend yield of 6.62%. The company has increased its dividend in each of the past 64 years. Yet while 3M may be one of the oldest (and highest-yielding) “dividend kings” out there, this “king” could soon decide to abdicate.
Reducing the payout would free up capital, to deploy in a turnaround/other strategic changes that could help shares get back on track.
As I argued before, although a cut could bode well for the stock in the long-run, don’t get caught holding the bag at the time of a possible dividend cut announcement. Shares will likely plunge on the news.
Annaly Capital Management (NLY)
The Federal Reserve’s cautious stance when it comes to lowering interest rates is why Annaly Capital Management (NYSE:NLY) is one of the top dividend stocks to sell.
This mortgage REIT’s nearly 14% forward dividend yield is appealing to income-focused investors, but as I pointed out earlier this month, Annaly’s shares have performed poorly during this high interest rate environment.
Namely, because these high rates have put the squeeze on the REIT’s net interest margins. High rates have also led to large unrealized losses in Annaly’s portfolio of mortgage-backed securities. Even as the market was expecting 2024 to be the year of the “Fed pivot,” more recent developments signal that rates may stay “higher for longer” instead.
This could mean net interest margins stay squeezed and portfolio losses persist. It may also mean an increased risk of a dividend cut. Hence, more trouble is likely ahead for NLY stock.
Whirlpool (WHR)
Whirlpool (NYSE:WHR) is another name Chris Senyek included in the aforementioned list of top dividend cut stocks.
Yes, compared to the other names on Senyek’s list, the appliance maker’s $1.75 per share in quarterly dividends (6.47% forward yield) represents just 44% of its estimated 2024 free cash flow.
That’s well below the figure for Kohl’s, as well as the rest of the stocks on that list (most of which have expected payouts near or above 2024 free cash flow). However, Whirlpool’s fiscal performance hinges heavily on lower interest rates and a rebound in the housing market.
The housing sector may be hyping up a 2024 “renaissance,” but if this fails to pan out, this company’s results could fall far short of expectations. In turn, necessitating a Whirlpool dividend cut. With many investors owning WHR stock for its yield, an announced cut could lead to a big selloff.
On the date of publication, Thomas Niel did not hold (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.