There are plenty of risky dividend-paying stocks with company-specific issues that make them clearly dividend stocks to avoid, but there are also some names in this category where the reason to stay away is not so apparent.
One such example is with shares in companies facing possible regulatory scrutiny. This regulatory scrutiny may threaten future profitability and dividend payouts.
Besides possibly having to reduce or suspend their dividends, these stocks may be at risk of declines, both related to the negatively-altered payouts, as well as because of the regulatory headwinds driving them.
With this factor possibly turning even high-quality dividend-payers (including some “dividend aristocrats”) into “dividend traps,” the best move for investors may be to sell/avoid them completely.
That’s the case here, with these seven dividend stocks to avoid. With each one, trouble may lie ahead, as governments around the world scrutinize them or their respective industries.
|BAC||Bank of America||$30.37|
|OHI||Omega Healthcare Investors||$27.78|
Bank of America (BAC)
Shares in leading banks like Bank of America (NYSE:BAC) sold off last month, on the heels of the banking crisis that took down regional institutions such as SVB Financial’s (OTCMKTS:SIVBQ) Silicon Valley bank subsidiary.
To some, the sell off with BAC stock and its big bank peers may look like an overreaction. However, there’s a good reason these names moved lower and March, and are struggling to bounce back, even as the dust settles.
As a result of this crisis, major banks may face stricter stress tests from the Federal Reserve.
This may result in limits on dividends and share repurchases, which of course could affect BAC’s return-of-capital efforts.
BAC currently pays out 88 cents per year in dividends (2.98% forward yield). Although some commentators argue that this risk is priced-in, it may be best to wait for this uncertainty to clear up before buying.
3M (NYSE:MMM) is considered a high-quality blue-chip, and with a 64-year track record of dividend growth, it’s not only considered a “dividend aristocrat” (at least 25 years of dividend growth), but a “dividend king” (50 years or more of dividend growth).
However, as the saying goes, “past performance is not indicative of future results.” That appears to be the story here with MMM stock.
The industrial conglomerate remains far from out of the woods with a pair of legal liabilities totaling $33 billion, both of which I have discussed in past coverage.
That’s why the market has priced 3M shares in a way that gives the stock a high forward yield (5.67%).
Some may see this as an overreaction, yet as RBC analyst Deane Dray has argued, these legal/regulatory troubles, especially those tied to past manufacture of PFAS chemicals, make the stock “uninvestable.”
Altria Group (MO)
Altria Group (NYSE:MO), parent company of Philip Morris USA, has been in the crosshairs of regulators for decades.
While this has been a drag on share price appreciation for the cigarette maker, thus far it has not had an impact on MO’s dividend payouts.
MO stock currently has a forward dividend yield of 8.35%. The stock is also a “dividend king,” raising its payout 53 years in a row.
Payouts have steadily grown by high single-digits over the past five years. However, MO’s dividend policy may be unsustainable.
Besides the risk that cigarette revenues (held steady for now via price increases) start to decline, with Altria’s continued pivot into “smokefree” products failing to make up for the difference, there’s also rising risk of further regulatory headwinds from the U.S. Food and Drug Administration (or FDA). Both factors could cause dividend cuts down the road.
Norfolk Southern (NSC)
Norfolk Southern (NYSE:NSC) is the railroad operator at the center of February’s East Palestine, Ohio train derailment. Although there were fatalities from the initial incident, the derailment resulted in the release of toxic chemicals into the environment.
NSC stock tanked on the news, and has continued to struggle, as the company remains in the hot seat regarding this event.
The U.S. Senate has grilled CEO Alan Shaw, and the U.S. Department of Justice, as well as the State of Ohio, have sued Norfolk Southern over the incident as well. Class action lawsuits are underway as well.
Even as sell-side analysts have argued that the direct financial impact from this incident is manageable, the derailment could still pave the way for more stringent railroad safety regulations.
These could affect NSC’s earnings growth, as well as its ability to increase its dividend payouts at an above-average pace.
Omega Healthcare Investors (OHI)
Omega Healthcare Investors (NYSE:OHI) may tempt income investors given its 9.73% forward dividend yield, but it may be best to consider this healthcare real estate investment trust (or REIT) one of the top dividend stocks to avoid.
As a Seeking Alpha commentator recently argued, OHI stock is at high risk of a dividend cut. Namely, because Omega’s funds available for distribution trail the REIT’s current rate of payout. Yet beyond this factor, there are other reasons to stay away from OHI and other REITs that own nursing home properties.
The for-profit skilled nursing facility industry remains under scrutiny from regulators and politicians. Worse yet annual funding increases from Medicare and Medicaid (3.7%) are failing to keep up with rising costs, particularly in labor costs. Squeezed and in the crosshairs, avoid/sell OHI.
Shell plc (SHEL)
Despite the latest efforts from the U.S. Government to prioritize the pivot towards renewable energy, American oil companies have been under a lesser amount of pressure to “go green” than their European counterparts. A good example is with U.K-based Shell plc (NYSE:SHEL).
In late 2021, Shell fully cut ties with The Netherlands and moved to Britain. A Dutch court order to reduce the company’s emissions on an accelerated timeline was likely a factor.
However, don’t assume this means the comanys eliminated regulatory risks. An environmental group has lodged a complaint with the Securities and Exchange Commission accusing Shell of “greenwashing.” There’s also been some political uproar in Britain about Shell’s record profits last year.
Taiwan Semiconductor (TSM)
As the world’s largest fabricator of chips, Taiwan Semiconductor (NYSE:TSM) has a big competitive edge in the industry. However, the strength of scale is also a weakness. At least, that’s the view of the U.S. Federal Government.
With tensions between the U.S. and China rising, the Biden Administration seeks to bring more chip production to America for economic and national security reasons. However, while “re-shoring” is good for America, it’s not necessarily a positive for TSM stock.
As Taiwan founder Morris Chang has openly stated, moving production from Asia to the U.S. will increase production costs and slow down innovation. With this possibly affecting TSM’s profitability in the future, as well as its ability to maintain/grow its quarterly payouts (forward annual yield currently at 2.06%), consider TSM one of the dividend stocks to avoid.
On the date of publication, Thomas Niel held MO. He did not hold (either directly or indirectly) any positions in any of the other securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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