When investors are looking for the best stocks, they often gravitate towards high-dividend yields. However, some stock experts caution that a high dividend payment does not always translate to a wise investment decision.
“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 emphasizes the importance of looking beyond just the high-dividend yield and evaluating the overall value of the stock. Here are six high-dividend stocks that some expert investors avoid:
1. Icahn Enterprises L.P. (IEP): A diversified holding company owned by billionaire investor Carl Icahn, IEP’s reliance on Icahn himself is seen as a potential red flag due to concerns about the sustainability of its payouts.
2. San Juan Basin Royalty Trust (SJT): This oil royalty trust’s income is directly linked to the fluctuating prices of oil and gas, making it highly sensitive to commodity price volatility.
3. Enbridge Inc. (ENB): A Canadian energy company, ENB is facing declining sales and a heavy debt load, raising doubts about its ability to maintain dividends.
4. Invesco Mortgage Capital Inc. (IVR): A real estate investment trust that invests in mortgage-backed securities, IVR’s high dividend yield raises concerns about its ability to sustain payouts in a challenging market.
5. Medical Properties Trust, Inc. (MPW): This REIT, which owns medical facilities, is facing financial challenges due to high leverage and declining profitability.
6. Global Net Lease Inc. (GNL): Another high-yield REIT, GNL’s financial stability is questioned due to its large debt obligations and negative net income.
While high-dividend stocks may seem attractive at first glance, investors should carefully consider the underlying financial health of the company before making investment decisions.