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15 Dividend-Paying Stocks to Sell or Avoid

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29.10.2020

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In this volatile market, many investors are looking to dividend-paying stocks to hedge their bets in equity markets. That's partially because the regular income delivered from dividends can help provide a measure of stability. That's also because the sectors that tend to be the most dividend-rich also tend to be relatively less volatile thanks to more reliable revenue trends.

However, that is not always the case. Particularly in the wake of the coronavirus pandemic that has upended what we once thought was "normal" economic activity, it's important to take a discerning view of any dividend-paying stocks rather than just chase high yields.

After all, the quickest way for a stock to double its dividend yield isn't to come up with a ton of profits to increase payouts by 100%. Rather, it's for its share price to be slashed in half – something that normally only happens after Wall Street sours on the business, usually for good reason.

Here are 15 dividend-paying stocks to sell or at least avoid right now. This isn't to say they won't someday become buys again. But at the moment, they all face their own unique challenges. They also all feature comparatively negative coverage from analysts, troubling scores from the DIVCON dividend-health rating system, and/or discouraging share-price momentum.

In addition, a few of these stocks pay dividends that have been reduced recently, while a few others sport payouts that might not be sustainable if current profit trends persist.

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With a decline of roughly 25% in 2019 while the S&P 500 had quite a good year, you might have thought the worst would be over for Kraft Heinz (KHC, $30.68), especially considering that COVID-19 has prompted a big boost in consumer staples sales – particularly packaged foods.

But while other similar brands have performed admirably in 2020, KHC is sitting on a single-digit loss year-to-date.

That's because the crippling debt load taken on by the $36 billion deal to merge Kraft and Heinz in 2015 continues to weigh on performance even years down the road. At the time, investing icon Warren Buffet called it "my kind of transaction," and after an instant pop of more than 20% for Kraft stock, in which he was a large investor, you could understand that sentiment in the moment.

But poor performance since then has been driven by deep cost-cutting to balance the books, which has left the product line behind current consumer tastes. Even worse, there also was a high-profile SEC investigation that resulted in deep write-offs and KHC restating three years of financials.

Said Buffett years later: "I was wrong (about KHC). ... We overpaid for Kraft."

Income hunters looking for bargains in dividend-paying stocks might be sniffing around Kraft shares, which trade at roughly one-third of their peak post-merger pricing in 2017. But as history has shown, if you think things can't get any worse for KHC stock, you might be sorely mistaken. After a dividend cut to just 40 cents per share in 2019, this stock's payouts might be a bit more sustainable – but even if these distributions stick, they can't alone offset the deep declines we've seen in recent years.

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Brick-and-mortar retailers were already facing plenty of pressures in the age of e-commerce competition. Then, when the pandemic hit and kept shoppers at home – and even more reliant on internet transactions than ever – things went from bad to worse.

While not a direct retailer itself, Macerich (MAC, $6.94), a real estate investment trust (REIT), is closely tied to this painful industry trend, given its 51 million square feet of real estate in 47 regional shopping centers across the U.S. And as you can imagine, as its tenants suffer from slumping sales and close their doors, it is weighing on MAC financially – both in lost revenue as well as falling rental prices for those tenants who remain.

Macerich was forced to slash its dividend from 75 cents per share to just a dime for its second-quarter payout, then raised it to 15 cents for Q3. But it still offers a giant yield of nearly 9% thanks to 90% share-price declines since the start of 2017. However, earnings per share are in the red through the first half of the year, and funds from operations (FFO, an important REIT profitability metric) are well off from this point last year.

"Despite the improving rent collections, we think cost control has to remain paramount, along with the board reconsidering whether dividends, in excess of REIT minimums, are worth the cash outflow," writes Piper Sandler's Alexander Goldfarb, who rates the stock Underweight (equivalent of Sell). "Given the amount of debt to be addressed, we believe cash flow is best used for deleveraging."

The bottom line remains the bottom line for this heavily shorted stock, with long-term pressures on retail real estate working against Macerich.

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In the U.S. financial sector, there is perhaps no stock more tarnished currently than Wells Fargo (WFC, $21.82).

For starters, it's important to recognize that the bank has always had a much more commercial approach than other financial giants like JPMorgan Chase (JPM) that boast large investment operations. That means WFC is acutely sensitive to consumer and business lending trends, which frankly have been hit pretty hard by the coronavirus and resulting economic downturn.

That by itself should be enough for investors to be wary in the current environment. But it also has suffered from a string of self-inflicted wounds and suspicious activity, from the 2016 revelations that millions of fraudulent accounts had been opened by unscrupulous staffers, to the more recent scandal that resulted in 100 employees being fired amid allegations that they lied to obtain personal small business loans earmarked for coronavirus relief.

It doesn't stop there. In Wells Fargo's latest earnings report, revenues and profits continued to sag dramatically. And with interest rates already near historic lows and the pressures of an economic downturn making the chance of any future rate hike slim, the financial sector broadly, and WFC in specific, is unlikely to see a change in fortune any time soon. No wonder Warren Buffett sold off 26% of his WFC stake in the Berkshire Hathaway (BRK.B) equity portfolio.

Despite all that, Wells Fargo doesn't even offer up a........

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