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High dividend yields don’t always make stocks attractive for investors. Often, stocks with high dividend yields can represent some of the worst investments available. There are two main reasons for this counterintuitive situation. This has led to the emergence of dividend stocks to avoid.
First, dividend yields can be high because the stocks that pay them have plummeted greatly since dividend yields rise as stocks fall. And equities that have dropped tremendously frequently have very poor fundamentals, making them susceptible to further, steep declines in the future. Secondly, sometimes struggling companies pay high dividends to entice investors to buy their stocks. And, of course, the shares of such problematic firms are pretty susceptible to sharp declines.
Here are three dividend stocks to avoid before their declines greatly damage your portfolio.
Icahn Enterprises (IEP)
Icahn Enterprises (NASDAQ:IEP) has a gargantuan dividend yield of 23%.
In May, the company was the target of a very negative report by Hindenburg, a research firm that usually shorts the stocks it criticizes. In my experience, Hindenburg’s adverse reports tend to be entirely or mostly “on the money.”
In its report on IEP, Hindenburg contended that IEP’s value was inflated by 75%, partly because the firm valued some of its assets too highly and partly because investors were attracted by IEP’s high yield and Icahn’s fame,
Since May, IEP stock has fallen by about 50%, but the shares still have a somewhat elevated price-earnings ratio of 29. Moreover, the company is the target of probes by both the Securities and Exchange Commission and the Department of Justice.
Given all of that baggage, IEO is one of the dividend stocks to avoid.
The Coca-Cola Company (KO)
Coca-Cola (NYSE:KO) has an elevated dividend yield of 3.4% and is one of the dividend stocks to avoid primarily because of its relatively high valuation, low, expected profit growth, and the threat posed by the new weight-loss drugs.
On the valuation front, KO has an elevated (for a staples stock) forward price-earnings ratio of 20, while analysts, on average, expect the company’s earnings per share to remain flat this year and only climb about 5% next year.
But the latter projection could be derailed by the new weight-loss drugs reducing the demand for sugary drinks. According to one study, patients who receive the drug lower their intake of sugary sodas by 65%.
Although I don’t expect the drugs to impact KO’s results next year significantly, they could prevent its profit from climbing in 2024, making the shares far too expensive at their current levels.
Kellanova (NYSE:K) was spun off from Kellogg’s earlier this year and sells the snacks that Kellogg’s had previously marketed. Among Kellanova’s offerings are cereal bars, Rice Krispies treats, and frozen waffles.
Kellonova has a dividend yield of 4.8% and has the same problems as Coca-Cola. Like KO, Kellanova has a high valuation for a staples stock as its trailing price-earnings ratio is 20. Also, like Coke, Kellanova ‘s profit growth is expected to be anemic, as analysts, on average, expect its earnings per share to drop to $3.61 this year from $4.21 in 2022 before staying flat in 2024.
Finally, Kellanova, like Kellogg, could very well be hurt by the proliferation of new weight-loss drugs in 2024, causing its profit to drop.
On the date of publication, Larry Ramer 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.