Sell Alert: Four 5-8% Yielding Stalwarts That I Am Avoiding

As most of my readers know, I tend to love high yielding dividend stocks, especially when they grow their dividends on a regular basis. I have a lot of respect for the Dividend Aristocrats (NOBL) and Dividend Kings, and we even hold some of them in our portfolios at High Yield Investor. We have a proven method for buying undervalued, quality high yielding stocks, collecting attractive income while we wait for the investment thesis to play out, and then – once the market corrects its mistake appraisal of these businesses – we recycle the capital into new opportunities, and the cycle repeats itself. This approach has led to remarkable total return outperformance since the inception of our portfolio two-and-a-half years ago, while providing us with a high single digit passive income yield as well.

That said, not all high yielding stocks – even in the form of Dividend Aristocrats and Dividend Kings – are worth buying. As investors in Dividend King V.F. Corporation (VFC) have learned over the past year, just because a company has an impressive dividend track record does not guarantee continued dividend growth and attractive total returns moving forward:

In this article, I share four high yielding dividend stalwarts – including two Dividend Kings and one Dividend Aristocrat – that I am avoiding right now.

#1. AT&T Stock (T)

As we recently discussed in greater depth, T is a serial underperformer that seems to get less and less attractive over time. In particular, there are three main reasons why we would not buy this stock today despite its attractive and seemingly sustainable yield:

1. Interest rates appear set to remain higher for longer. With T’s heavy debt load, this is forcing management to pay down its debt as quickly as possible, leaving precious little cash for boosting the dividend and/or investing more aggressively in driving growth in its business.
2. The decline in earnings per share and dividend per share growth. This makes the stock purely a bond substitute as the only reason to invest here is for the yield. However, its valuation looks quite unattractive relative to interest rates as its yield is at a historically low spread to the Federal Funds rate.
3. The business model’s moat looks shallower and narrower than ever before, with Amazon (AMZN) now being reportedly considering entering the industry as a competitor by leveraging its Prime Membership to provide discounted mobile service. This could deal a very severe blow to T if it comes to fruition.

#2. IBM Stock (IBM)

IBM is another stock which – despite its attractive and growing dividend yield and Dividend Aristocrat status – we find unappealing at the moment. The three main reasons are:

1. The growth rate is quite slow and could very well slow further moving forward with its primary growth engine – Red Hat – underperforming in Q1, prompting management to reduce guidance for FY2023.
2. The valuation does not look attractive at all, with its EV/EBITDA multiple sitting at elevated levels relative to its recent history.
3. With a fairly hefty debt burden (~$51 billion), and increasingly burdensome payout ratio, a rising share count, and ever-growing competition from more nimble and savvy competitors across the tech space, IBM will likely continue to struggle to drive accelerated earnings per share growth in the future.

#3. Altria Stock (MO)

MO is probably the most investable stock on this list thanks to its defensive business model, sticky customer loyalty, and high and sustainable dividend yield. However, we are simply not impressed by the investment proposition here. Yes, the 8% yield and Dividend King status are impressive at first glance. However, the business is plagued by three major warts that will likely prevent it from achieving meaningful long-term alpha:

1. Management piled up debt in past years while pouring cash into overpriced share repurchases and ill-fated acquisitions like the Jull Labs fiasco. With interest rates rising and likely remaining in a higher band for longer, management will feel the pressure to not take on any more debt moving forward, which could restrict their ability to drive long-term sustainable growth.
2. They have struggled to grow outside of their core smokable products business segment. As a result, it is hard to see them sustaining their dividend growth streak over the long-term.
3. Their core smokable products business is shrinking. Yes, they have been able to sustain and grow earnings per share through a combination of buybacks, price hikes, and cost cuts. However, there is only so far that they can go with price hikes and cost cuts and their aggressive pace of share buybacks is slowing as past buybacks have proven to be fruitless and the company’s cost of capital has risen with interest rates shooting higher over the past year. Moreover, with demographic trends working against them, the coming decade will likely emerge to be particularly challenging for them as they struggle to reinvent the business.

#4. 3M Stock (MMM)

Last, but not least, 3M has been a huge underperformer over the past decade, with its stock price at an even lower level than it was ten years ago:

What happened to the business? While its moat remains strong, the business has been plagued by legal issues regarding some of its products and anemic growth.

As a result, dividend growth has also dried up over the past three years with the payout barely inching higher:

As a result – especially when combined with ongoing global inflationary, geopolitical, and recessionary headwinds – there is little reason to get excited about buying this stock right now. Sure, the 6.3% dividend yield looks attractive here and is likely sustainable, but dividend growth will likely remain in the low single digits for the foreseeable future. As a result, the best case scenario is high single digit annualized returns, but it is also very possible that if a recession hits, the stock will flounder for several years with little to no earnings per share growth.

Investor Takeaway

While we are thankful to say that our experience investing in quality high yield stocks at High Yield Investor has been remarkable thus far, we also know that not every high yielding stock – even ones with impressive moats and dividend growth track records – is a good investment. The four high yielding stalwarts we discussed in this article are likely going to prove to be examples of this principle moving forward.

Instead, we are looking for stocks that combine attractive current yields with solid growth prospects and a clear margin of safety in the valuation. One of our top picks of the moment that fits these criteria is Blue Owl Capital (OWL), as we expect it to significantly outperform the four stalwarts discussed in this article.