By Matt Doiron
We think that a dividend portfolio rooted in large-cap stocks with yields in the 3-5% range can benefit from limited exposure to more speculative - and higher yield - names. Whether because of a recent fall in the stock price or some other factor (for example, the proliferation of real estate investment trusts, which are required to distribute a large share of taxable income to shareholders in order to maintain their favorable tax treatment), some stocks currently pay dividend yields well above those levels, and even above 10%. However, not all of these monster yielders are worthy of consideration. Here are five stocks that currently pay dividend yields of 5% or higher that we think that income investors should be sure to keep away from:
GPS navigation products company Garmin (GRMN) leads our list. Even though Garmin is the market leader in its industry and its current quarterly dividend payment of 45 cents implies a yield of just over 5%, we don't think that it is a smart income pick. Smartphone apps are poised to shrink the industry, and pretax income shrunk by 18% in the first quarter of 2013 versus a year earlier. With over half of earnings going to pay the dividend, we don't think that those payments are safe and would expect the yield to come down in the future. Robert Caruso's Select Equity Group was the largest holder of Garmin out of the funds we track in our database of 13F filings; it cut its stake by 12% during Q1.
Another high yielder that we'd avoid is $2.4 billion market-cap packaging, marketing and mail services company R.R. Donnelly (RRD). The quarterly dividend payment has been 26 cents per share since 2003, and at current prices that represents a dividend yield of 8%. However, R.R. Donnelly has been seeing a decline in earnings and is highly leveraged. We'd worry that a further decline in business could place the dividend at risk. A number of market players are bearish on the stock, with the most recent data showing that 33% of the float is held short. That's aggressive for such a high yield stock, and in the short term we think there could be some covering, but we would not call it a long term dividend play.
While utilities in general make for good income stocks, given their high yields and lack of exposure to the broader economy, we think that there are better picks in the industry than First Energy (FE). The current dividend yield is 5.2%, but in the first quarter of 2013 the company's dividend payments were higher than either its cash flow from operations or its net income. As a result we'd be concerned that First Energy might have to cut its dividend payments unless its business improves. The stock has fallen 16% in the last year. Clint Carlson's Carlson Capital initiated a position of 1.1 million shares between January and March (see Carlson's stock picks).
Macquarie Infrastructure (MIC) also seems like a 5% yielder to avoid. In its most recent quarter revenue was flat compared to the same period in the previous year, with net income being down significantly. Macquarie Infrastructure has a number of business interests including airport fueling and hangar services as well as natural gas distribution. Currently dividend payments are high, but we'd note that the company's dividend was suspended during the financial crisis, only resumed in mid 2011, and passed its pre-crisis highs only last November. In addition, dividend payments are high relative to the company's profits as well, and so we would avoid the stock
$21 billion market-cap telecom company CenturyLink's (CTL) current dividend yield is almost 6%, but the company offers a number of warnings signs for income investors. It recently cut its quarterly dividend payment by about a third, and even so its dividend payments last quarter (as well as on a trailing basis) were higher than net income. With revenue declining last quarter compared to Q1 2012, we'd be concerned that earnings aren't sustainable at current levels- and if that's the case than the dividend probably won't be either. Billionaire Ken Griffin's Citadel Investment Group closed its position in CenturyLink last quarter (find Griffin's favorite stocks).