The landscape for income investors seeking higher returns becomes a greater challenge. While central banks are preparing to lower interest rates to prevent the world economy from going into recession, the expectations of a low-return environment are pushing investors to find high-yielding alternatives and betting more riskily.
This is one of the main causes behind reaching a new record high of 2,954.18 last Thursday. Although dividend shares, with their solid income streams, can offer shelter as the sky gets darker, it is also important to understand that not all income stocks are safe.
Below are three high-yielding stocks that we believe investors should avoid despite their extremely attractive dividend yield:
1. Ford Motor Co.
One of America & # 39; s largest automakers – Ford Motor Company (NYSE 🙂 – has become attractive for investors looking for returns. Stock trading, which was trading at $ 9.84 yesterday towards the end of the year, offers a dividend yield of more than 6%. This is a huge premium if you compare it with the average return of the S & P 500 of just 1.9%.
But before Ford shares are purchased, careful investors must ask themselves whether the company's payout is safe and sustainable – the payout ratio of more than 80% is almost four times the industry average of 22%.
The past few years have been tough for Ford. After many years of rising sales, aided by the robust global economy and consumer demand, the automaker is now facing a strong headwind: it is undergoing a restructuring of $ 11 billion after falling by more than half last year because the demand for his sedan cars slowed down. The turnaround consists of canning thousands of paid jobs, closing factories abroad and building capacity to produce electric and cars without drivers
While Ford undertakes this huge restructuring exercise to improve profitability and get ready for this new era, investors have not shown much confidence. The stock has traded less than $ 10 since last summer, amid concerns over the sustainability of its generous $ 0.15-a-share quarterly dividend.
Analysts have built in a possible scenario in which Ford's creditworthiness could be lowered quickly and the dividends would be lowered if the company's pay-as-you-go plan failed. If the US economy enters a recession or faces a sharp slowdown, the demand for gas guzzling SUVs will decrease. It is therefore better to avoid Ford despite its higher yield in this uncertain economic environment.
2. AT & T Inc.
AT & T (NYSE :), the largest telecom operator in the United States, is another dividend stock that offers a return that is hard to ignore. Ending yesterday at $ 32.55, the shares offer an annual return of 6.3%, paying a quarterly dividend of $ 0.51 per share
But that substantial return does not come without risks. AT&T is rushing to become a modern media giant at a time when consumers are cutting cables and subscribing to cheaper entertainment options such as Netflix (NASDAQ :). To survive in this disruptive environment, the company bought Time Warner last year, with popular content assets such as HBO and CNN, for $ 85 billion.
But that acquisition brought AT & T's debt under control and caused operational complications. AT & T has a net debt of $ 169 billion and says that 75% of the debt it bought to buy Time Warner will be paid off by the end of this year.
AT & T & # 39; s dividend yield indicates that investors will see some sort of austerity on their dividend bill of $ 15 billion ahead if the company's reversal plan does not come. Due to this continuing debt overhang, we advise investors not to catch this trap.
3. Schlumberger
Schlumberger (NYSE :), & # 39; the world's largest oil service provider, has seen a share of about 20% fall to $ 38.58 in the aftermath of yesterday, following concerns that & # 39; the world's largest oil and gas developers will lower their spending plans amid growth and a challenging supply and demand situation in the markets. That bearish spell has depressed the dividend yield on its shares by almost 6%.
The stock, which has fallen by more than 67% in the last five years, may seem attractive to some contradictory investors. The annual dividend yield of 5.2% is more than double the five-year average. But the current environment is not conducive to oil and gas exploration and production companies continuing to squander while under pressure from shareholders to return capital. That, in turn, reduces the demand for oilfield services, according to S & P Goboob, which broke Schlumberger's credit rating last month.
In this uncertain global economic and geopolitical environment, they are not allowed to support their recent profits. It is better for investors to stop trading in this market now.
Bottom Line
Investing in high-yield dividend shares is not always profitable. Investors should carefully choose their positions, with an emphasis on companies with strong balance sheets, low debts and a long history of rewarding investors. The three shares above do not match.
