The search for yield has become even more pressing for income investors, and as inflation outpaces many of the payouts on offer, the list of dividend stocks to sell is getting larger. Of course, dividends aren’t the only way investors can make money—share price growth is another factor to consider as well. However, some shares are out there whose dividend looks unsustainable as is, and growth ahead looks thin on the ground.
Finding a reliable dividend is more challenging than you might think. Most investors use yield as a touchpoint to compare dividend stocks. Yield is calculated by dividing the dividend per share by the share price and then multiplying it by 100. But there are a few things to consider. However, this isn’t a perfect way to evaluate payouts because an abnormally low share price can inflate yield considerably. That means stocks that have been punished can come with ultra-high dividends.
Second, yield is a backward-looking metric. It looks at the most recent dividend payout compared to the current share price. If you buy a stock whose last payout meant the yield is now 8%, but they cut their dividend at the next earnings report, you’re out of luck. That’s why it’s important to evaluate how strong a particular dividend is and whether it’s likely to continue rising or at least be maintained.
Company financials are the best way to do this. The quickest way to get a snapshot of whether a dividend is sustainable is to look at the payout ratio. The payout ratio is calculated by dividing dividends paid by net income, and it tells you whether the company’s profits are covering its dividend payments. If a company is funneling most or all of its money into dividend payments, it could spell trouble for the future. If the payout ratio is over 100%, it shows a company that can’t afford its dividends.
Dividend Stocks to Sell: Altria (MO)
Tobacco company Altria’s (NYSE:MO) yield has climbed beyond 8%, but it’s still a dividend stock to sell. That inflation-busting figure is no doubt a big part of the bull case for Altria, but the company may not be able to boast such a huge yield much longer. Altria shares have fallen over 18% over the past year, which is a big part of why the yield has risen. But more importantly, the group’s payout ratio looks high, which could mean the dividend will end up on the chopping block.
The tobacco industry’s declined for years as smoking lost its luster. Not only is the public starting to wise up to the risks of tobacco products but there are a lot of investors out there nowadays that consider tobacco stocks to be uninvestable. That means growth in this industry is hard to come by. Most big names are working on “healthier” products like heated tobacco and vaping. But so far, uptake’s been slow.
Altria’s answer to the dwindling number of customers is to raise prices. This strategy has worked so far, but there’s a tipping point where price will become a barrier. Already, the group’s seen its price hikes start to chip into its market share. Ultimately, the group’s stagnant core business and an unsustainable payout ratio suggest this dividend stock is one for the trash.
AT&T (T)
Telecom giant AT&T (NYSE:T) has been a potential turnaround stock for years, but given the current environment, it’s now firmly on the list of dividend stocks to sell. The group boasts a yield just shy of 6%, which might look appealing thanks to persistently high inflation. But much of that yield is thanks to a tanking share price.
The first issue with AT&T as a dividend stock is its payout ratio. It’s already well beyond the industry average, and it’s only going to get worse. Telecom stocks as a whole are in a tough position as the sector undergoes a difficult transition. And AT&T’s sitting at the bottom of the pile of lukewarm options. The group lacks a compelling growth story, and its financial performance has been patchy at best.
Last year, management trimmed its dividend payouts to cope with dwindling cash flow. But even that wasn’t enough to bring the payout to manageable levels. The group’s still spending most of its income on dividend payments, leaving little room for investment in growth and opening the door for another potential dividend haircut.
Ford (F)
The auto industry is in the midst of a transition, but Ford’s (NYSE:F) is struggling to keep up, making it one of the dividend stocks to sell. The electric vehicle transition is gaining momentum, with many countries promising to phase out traditional fossil fuel cars as early as 2030. Thats a big deal for Ford, which is still working to build out an EV portfolio that can turn a profit. The group’s said it would lose around $3bn this year as it works to keep up with the demand for cleaner cars.
On top of a shift toward cleaner vehicles, Ford’s also contending with a potential prolonged economic downturn. That means people are less likely to shell out on big-ticket items like new cars. This means Ford’s pouring cash into its business making new cars that it will find difficult to sell.
With those two factors in mind, earnings growth could be thin, if at all, moving forward. That means the dividend is really the main attraction, and coming in below 5% isn’t all that impressive, thanks to current inflation rates.
On the date of publication, Marie Brodbeck 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.