Four Dividend Stocks to Avoid

The number of dividend cuts in the S&P Dividend Aristocrats index increased to seven, as two more financial stocks cut their dividends in May. Because of the timing of the index rebalancing, these stocks would continue to be on the elite dividend index until the end of December 2009. Historically dividend cutters have underperformed the stock market while dividend growers and initiators have outperformed the stock market averages. As a dividend growth investor I buy stocks that keep growing their dividends and sell stocks that cut or eliminate their dividends.

The two stocks, which recently slashed dividends in 2009, will most likely be taken off of the elite dividend index in December are Legg Mason (LM) and BB&T Bank (BBT)

Legg Mason cut its dividends in May after reporting losses for the last quarter of 2008. The company had just been added to the S&P Dividend Aristocrats index in December 2008. This must have been the shortest a company stays on average in the ranks of the elite dividend index.

BB&T Corporation is the latest dividend aristocrat to cut dividends, in an effort to repay the TARP loan from the Treasury. This action would save the company $725 million on an annual basis. In addition to that the Winston-Salem based North Carolina bank also sold 75 million shares for 1.5 billion dollars in order to repay the government sooner. BBT had been raising dividends for 37 consecutive years. Check my analysis of BB&T Corporation.

The Dividend Aristocrats index is hardly an exception to the rule however. The dividend achievers and the international dividend achievers are two other indexes, which still include dividend cutters in them. Pfizer (PFE) and Nokia (NOK) are two such examples.

Pfizer cut its dividend payment in half when it decided to acquire Wyeth (WYE) in an effort to extend the life of its portfolio of drugs. This made it easier for the company to fund the deal, which was financed by debt, equity and cash. Check my analysis of Pfizer.

In January Nokia cut its dividend in an effort to reflect lower earnings, preserve cash and position itself for slide in mobile phone sales. This was the first dividend cut for the Finland based company since 2002. Check my analysis of Nokia.

It is a curious phenomenon to see plenty of dividend cutters and eliminators still being part of dividend indexes, which is trickling down to dividend ETFs and mutual funds. While these stocks are polluting the income indexes, it seems that certain investment strategies based on dividend growth investing are not being tracked correctly. Another reason why I would not consider investing in dividend ETFs is exactly the fact that certain stocks could be held in the fund, even though their place should not be there.

Comments

[adventure62:]

I have just received my dividend from Nokia. Your comment about Nokia is not up to date. They may have suspended the dividend earlier but it is back. Do your due diligence.

May 19 11:21 AM

[BloggingBanks:]

He said Nokia cut its dividend, not that it eliminated it. Learn to read before you jump to conclusions.

May 19 11:36 AM

[Living4Divi...:]

Excellent post. You said:
"It is a curious phenomenon to see plenty of dividend cutters and eliminators still being part of dividend indexes, which is trickling down to dividend ETFs and mutual funds. While these stocks are polluting the income indexes, it seems that certain investment strategies based on dividend growth investing are not being tracked correctly. "

Answer: Most Dividend ETFs rebalance quarterly. When you see a dividend cutter still listed in the holdings of a particular Dividend ETF, it means that the ETF hasn't rebalanced yet. I assure you, they wont leave dividend cutters in for long.

May 19 12:47 PM

[Living4Divi...:]

" Another reason why I would not consider investing in dividend ETFs is exactly the fact that certain stocks could be held in the fund, even though their place should not be there."

Answer: The Dividend ETFs use different strategies to construct their portfolio. Sometimes they screen for reliable dividend ( Div/Earnings <= 60%) and sometimes they screen for consistent dividend (Dividend Achievers). Some just pick high dividend yielders period - these funds are sure to have high turnover. You have to pick the strategy which is most likely to avoid dividend cutters. So far, NONE of the Dividend ETFs have been able to pick safe dividend payors with 100% accuracy.

May 19 12:51 PM

[Alan Young:]

The time to avoid a dividend stock is BEFORE the dividend is cut; once it is cut, of course, the cut is priced in, and it's no better or worse than any other stock.

So it would be a far better service to tell us what dividends are apt to be cut in the future, than simply recite (or condemn) those that have already occurred—if you could.

May 19 03:21 PM

[David Van K...:]

I follow several dozen dividend stocks, my "Top 40" (www.sensiblestocks.com...) plus a few others. I winnow this list down once a year and do my best to screen out those with dividends in peril...taking a forward-looking approach..

But the winnowing is hard work. I begin with a universe of hundreds of candidates, use a few basic tests to get the list under 150 or so, then research each stock one-by-one. I know of no other way to do it. So to ask this author to just "tell us what dividends are apt to be cut in the future" is asking a lot.

This excellent article illustrates something I've been harping on for a few weeks: The necessity to get dirt under your fingernails and do actual research. The problem with lists like the Dividend Aristocrats and ETFs based on such lists, is that they are backward-looking. Their rules may allow them to carry stocks that have already announced dividend cuts if the cut hasn't been implemented yet.

The best current example is GE: It announced an intent to cut its dividend in the second half of 2009 many weeks ago, but it is still carried on the Dividend Aristocrats list. S&P (which maintains the DA list) reconstitutes it each December. It won't be until December that GE is removed from the list.

It fakes people out and illustrates why you need to do your own research. Just because a stock is on the DA or any other similar list, or is owned by a dividend-oriented ETF, does not mean that stock is a good dividend investment.

May 19 04:22 PM

[FRANJUST62@...:]

I HAVE 22 STOCKS ALL PAYING DIVIDENDS. MANY YEARS AGO SMARTER INVESTERS THAN ME ADVISED TO ONLY PURCHASE COMPANIES THAT PROVIDE DIVIDENDS. AFTER 20 YEARS UTILIZING THIS POLICY I REALLY DON'T GET EXCITED IF MY PORTFOLIO DROPS AS LONG AS MY ESTIMATED ANNUAL INCOME CONTINUES TO INCREASE THROUGH DIVIDEND REINVESTMENTS. YOU CAN'T FIND A BETTER SYSTEM THE BETTER THE STOCK MARKET THE HIGHER YOUR STOCKS RISE THE MORE THE DIVIDENDS ARE SAFE. COCA-COLA THE GREATEST COMPANY ON THE PLANET PER WARREN B WOULD HAVE MADE YOU RICH WITH A $1000 INVESTMENT 25 YEARS AGO

May 19 06:37 PM

[Victhom:]

Thanks i'm adding more Pfizer with $70B revenues soon....and vaccines....I guess Pfizer will be better than this paper LOL

May 20 12:05 AM

[Another View:]

Good luck with Pfizer. LOL. Lost enough money there already.

May 21 10:58 AM

[AssetReset:]

My policy right now is this: invest in dividend payers that earn money off hard, mostly inelastic demanded assets (CVX)

I can't rely on financial institutions to pay me dividends on earnings from self-priced assets.

Oil is still marketed to market, so are basic materials.

May 21 04:25 PM

[Living4Divi...:]

I agree. On a side note: one stock recently WENT UP IN PRICE after a dividend cut announcement. Strange times we live in.

On May 19 03:21 PM Alan Young wrote:

> The time to avoid a dividend stock is BEFORE the dividend is cut;
> once it is cut, of course, the cut is priced in, and it's no better
> or worse than any other stock.
>
> So it would be a far better service to tell us what dividends are
> apt to be cut in the future, than simply recite (or condemn) those
> that have already occurred—if you could.
>
>

May 22 03:00 PM