There are several rules of thumb when it comes to picking out the best investments for retirees. Dividend stocks are popular investments for retirees because of the power of dividend compounding over time. In addition, dividend stocks are typically blue-chip companies with solid cash flows and long track records of strong performance.
It’s certainly not bad advice to recommend a retiree buy stocks in companies with recognizable brands and high dividend yields.
Unfortunately, there are exceptions to every rule of thumb, and dividends aren’t necessarily guaranteed. Potash Corporation of Saskatchewan (USA) (NYSE:POT), Noble Corporation Ordinary Shares (UK) (NYSE:NE) and Kinder Morgan Inc (NYSE: KMI) are just three examples of recognizable companies that have cut their dividends recently.
Not only have investors been denied the dividend yield they thought they were getting, but stocks in danger of dividend cuts tend to underperform in the market as well.
Retirees should look deeper than a stock’s dividend yield before investing for the long-term. With that in mind, here’s a look at three recognizable dividend stocks retirees should avoid at all costs.
Dividend Stocks to Avoid: Abercrombie & Fitch Co. (ANF)
At first glance, Abercrombie & Fitch Co. (NYSE:ANF) and its 6.6% dividend yield may look like a great buy for a retiree. Unfortunately, ANF stock is raising all kinds of red flags. For starters, Abercrombie’s business is shrinking. Revenue is down 18.2% in the last five years, despite the fact that the U.S. economy has boomed.
The problem doesn’t seem to be getting any better. ANF stock hasn’t registered a single quarter of positive year-over-year revenue growth in the last eight quarters.
Another major red flag is the company’s payout ratio. The payout ratio is a measure of just how much of a company’s profits are going right back out the door to make dividend payments. Ideally, retirees should look for payout ratios under 50%. The lower the better. Today, Abercrombie’s payout ratio is an incredible 470%. That’s a major warning sign that ANF stock won’t be able to continue on this path for much longer.
Five years ago, Abercrombie paid a dividend in the 1.5% to 2.5% range, which is fairly typical for dividend stocks. Don’t be surprised to see the company cut its dividend back to that range in the near future.
Dividend Stocks to Avoid: Staples, Inc. (SPLS)
Staples, Inc. (NASDAQ:SPLS) is…
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