Investors have been turning to companies with high dividend yields to manage current market volatility. A steady income stream provides a nice ballast for a portfolio during uncertain times. But not all such companies are created equal. These three dividend stocks to sell will not give investors the security they are hoping for.
When looking at dividend-paying stocks, it is important to consider their track records and future outlook. A company’s dividend, after all, is closely tied to its ability to generate steady earnings and cash flow.
For these three dividend stocks to sell, there are considerable doubts on that front. As such, investors should carefully reevaluate their holdings in these companies and investigate more sturdy alternatives.
Dividend Stocks to Sell: AT&T (T)
AT&T (NYSE:T) used to be one of America’s most reliable blue-chip companies. But, in recent years, the firm has lost its way.
Struggling to find growth in its core market, AT&T made a series of expensive acquisitions for assets such as Mexican telecoms and DirecTV. Then the big blunder hit when AT&T shelled out $85 billion for Time Warner in hopes of creating a media empire. However, AT&T could not bring about anticipated synergies out of the deal. Eventually, it spun out the assets, taking a considerable loss on the maneuver.
But the pain didn’t end there. AT&T amassed a huge pile of debt in making those deals, at one point even becoming the most indebted company in the world. It slashed its dividend last year as part of its efforts to shore up the balance sheet.
But it still has more than $120 billion in debt. In a world with sharply higher interest rates, this could add billions to AT&T’s annual interest expense over time as interest rates reset. Meanwhile, the firm’s core telecom business struggles amid high fixed costs and rising competition. AT&T was a great income name, but it’s no longer a reliable blue-chip holding. Thus, it is one of the top dividend stocks to sell.
Innovative Industrial Properties (IIPR)
Innovative Industrial Properties (NYSE:IIPR) is a real estate investment trust (REIT) focused on greenhouses for growing cannabis.
IIPR stock launched to tremendous success by filling a huge market need. Due to the federal marijuana ban, it’s nearly impossible for marijuana farmers to access the traditional banking system. As such, there was a need for financing for building greenhouse facilities that banks couldn’t fill.
Innovative Industrial figured out the solution. It raised money from investors, put greenhouses together, and rented them out to cannabis growers at lucrative rates. This worked fantastically for a while, leading IIPR stock to multi-bagger returns.
However, the strategy isn’t working anymore. That’s because Innovative Industrial’s tenants are starting to run into financial distress. The cannabis industry has failed to achieve the levels of profitability that operators had expected. And as a result, they are struggling to pay rent to Innovative on time. Indeed, four major tenants have missed payments so far.
Ultimately, a company’s dividend is based on its cash flows. As major Innovative Industrial tenants are no longer capable of paying their rent, it seems likely that the REIT’s cash flows will decline. And there’s no easy solution. There’s not much else that can be done with an old cannabis greenhouse that doesn’t involve a major reduction in rent, after all.
Putting it all together, it seems likely that Innovative is heading toward a dividend reduction. The yield at 10% looks great today, but there is little reason to think the yield will be sustainable, given the distress that the American cannabis industry faces today.
Tanger Factory Outlets (SKT)
Tanger Factory Outlets (NYSE:SKT) is another REIT. This one specializes in outlets, a type of specialized retail property.
Outlet stores rose to popularity several decades ago as a trendy way to buy discounted merchandise from name-brand retailers. These outlets would typically be located along highways far outside of city centers, giving travelers a fun diversion during road trips. Retailers also appreciated that they could discount certain items at an outlet location without cheapening their brand at their main mall locations within urban areas.
Needless to say, this business model makes little sense in the year 2023. With e-commerce, it is far harder for brands to have multiple pricing strategies based on differing geographies. And, nowadays, shopping is either based on necessity (such as groceries) or on a fun experience. Outlets have an awkward role in the new retail landscape.
Big urban malls have been able to lean more on additional draws, such as entertainment options and upscale restaurants, to draw traffic. Outlets, by contrast, rely more on traditional retail of apparel and other items that have largely moved to online channels.
Traffic data plays this out. Outlets had the slowest recovery in foot traffic from the pandemic, and they already returned to negative growth in 2022. With inflation and higher gas prices making an impact, it seems unlikely that far-flung outlet malls will be all that competitive in the new retail landscape. This leads to SKT stock likely being a value trap in the months and years to come.
On the date of publication, Ian Bezek did not have (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.