Yahoo Finance I’m a Stock Expert: 6 High-Dividend Stocks I Won’t Invest In
When investors are searching for the best stocks, they’re often drawn to high-dividend yields. It makes sense at first glance, but some stock experts say a nice dividend payment doesn’t necessarily make for a smart investment.
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“We believe that stocks with very high-dividend yields are often poor investments,” said Deiya Pernas, CFA and co-founder of Pernas Research. “A high yield typically indicates that the market anticipates a dividend cut, leading to a sharp sell-off in the stock price. These stocks usually have high debt loads, elevated dividend payout ratios, and low EBITDA cash flow conversion, all of which signal financial instability and indicate a high likelihood of future dividend cuts.”
Pernas believes it’s important to look past a high-dividend yield and consider the stock’s value as a whole. Here are six high-dividend stocks some expert investors won’t touch.
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Icahn Enterprises L.P. (IEP)
Current Dividend Yield: 24.23%
Icahn Enterprises is a diversified holding company owned by billionaire investor Carl Icahn. The company buys and manages businesses it believes are undervalued, aiming to improve them and increase their value.
“IEP is known for its diversified investments across various sectors, including energy, automotive, food packaging, metals, real estate, and home fashion,” said Pernas.
Pernas believes that IEP’s dependence on Carl Icahn is a potential red flag. If something were to happen to the 88-year-old Icahn, it could put IEP in a bad position.
“The extremely high-dividend yield reflects market skepticism about the sustainability of its payouts,” said Pernas. “The company’s substantial debt load and recent negative earnings indicate potential liquidity issues and a possible need for asset divestitures or operational restructuring to stabilize finances.”
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San Juan Basin Royalty Trust (SJT)
Current Dividend Yield: 8.49%
San Juan Basin is an oil royalty trust whose income comes from oil and gas in the San Juan Basin of New Mexico.
“The trust’s income and distributions are directly tied to the fluctuating prices of oil and gas, making it highly sensitive to commodity price volatility,” said Pernas. “With a high-dividend yield, the market anticipates a potential reduction in distributions, especially given the trust’s high payout ratio and declining production rates. The negative sales growth and low cash flow conversion highlight the challenges in maintaining stable income streams in a volatile energy market.”
SJT’s income comes from oil and gas. That means that when energy prices rise, the trust’s distributions increase. However, the reverse is also true — when oil and gas prices fall, so do the payouts to shareholders.
Enbridge Inc. (ENB)
Current Dividend Yield: 7.33%
Enbridge is another energy company, headquartered in Canada. Their pipelines transport oil and natural gas across North America.
“Year-over-year sales are expected to continue to decline for several more quarters,” said Jim Brown, senior portfolio manager and research analyst at Buckingham Advisors. “To maintain its CapEx and dividends, debt will need to increase on top of what is already a heavy debt load (net debt/EBITDA of 6.5x).”
Brown said that the 7.33% dividend yield might seem interesting, but he doesn’t expect much growth from ENB within the next few years. He also cautioned that the company could end up issuing more shares, which could mean lower dividends per share for you.
Invesco Mortgage Capital Inc. (IVR)
Current Dividend Yield: 17.22%
Invesco Mortgage Capital is a real estate investment trust (REIT) that invests in mortgage-backed securities and residential/commercial mortgages.
“IVR invests in residential and commercial mortgage-backed securities, which exposes it to interest rate risk and credit risk,” said Pernas. “The company’s high-dividend yield suggests that investors are wary of its ability to sustain current payout levels, particularly in a rising interest rate environment. The substantial drop in year-over-year growth and significant negative earnings reflect the impact of unfavorable market conditions on IVR’s portfolio performance.”
Pernas pointed out IVR was using short-term borrowing to finance their longer-term assets, a risky situation that he thinks could create problems for them in the future.
Medical Properties Trust, Inc. (MPW)
Current Dividend Yield: 11.19%
Medical Properties is a REIT that owns acute care hospitals and other medical facilities across the U.S. and abroad.
“MPW focuses on acquiring and developing net-leased hospital facilities,” said Pernas. “While the healthcare sector can be resilient, MPW’s high leverage and recent financial performance raise concerns.”
Pernas also thinks the high-dividend yield may be unsustainable given MPW’s debt burden and their declining profitability.
“The high long-term debt indicates potential refinancing risks and limited financial flexibility,” said Pernas. “Moreover, the company has faced scrutiny over its exposure to financially troubled tenants, which could further impact its revenue stability and ability to maintain dividend payouts.”
Global Net Lease Inc. (GNL)
Current Dividend Yield: 14.71%
Global Net Lease is yet another high-yield REIT. The company invests in commercial properties across the United States and Europe. But according to Pernas, there are some red flags.
“Despite its geographic diversification, GNL faces significant financial challenges, as evidenced by its high dividend yield and negative net income,” said Pernas. “The company’s large debt obligations and high dividend payout ratio suggest that it may struggle to sustain current distribution levels.”
On top of that, he pointed out that if any of the markets GNL operated in hit a rough patch, or if their tenants started defaulting on rent, that could make GNL’s shaky financial situation even worse and really hurt returns for investors.
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This article originally appeared on GOBankingRates.com: I’m a Stock Expert: 6 High-Dividend Stocks I Won’t Invest In
