7 Dividend Stocks to Avoid in Your Retirement Portfolio

Stocks to sell

Amid soaring inflation, interest rates have also surged. Fixed income options such as certificates of deposit are paying the highest interest rates that they’ve offered in more than a decade. This has caused ripple effects, such as driving up yields on many dividend stocks. Simply put, it’s a great time to be an income investor. But people should still act with prudence. There are dividend stocks out there to avoid.

In fact, for these seven stocks, the future could be looking rather grim. With a potential economic recession on the horizon and consumers cutting back spending, it’s time to dump these seven dividend stocks to avoid damage to your retirement portfolio.

AT&T (T)

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An ideal retirement stock would be a company with a stable business model, a solid balance sheet and steadily rising earnings and cash flows which can support increasing dividend payments.

Given that framework, AT&T (NYSE:T) is the perfect example of a dividend stock to avoid. The company has delivered little-to-no long-term earnings growth as it has struggled to replace the cash cow that was wireline telephony.

AT&T stock sold for around $15 per share in 1993. 30 years later, the stock sells at the same price. This is a disastrous outcome given all the advances in mobile communications and the internet which could have given AT&T massive new cash flows.

Meanwhile, AT&T has engaged in massive and spectacularly unsuccessful dealmaking. This has saddled the company with gigantic amounts of debt. Before recent asset divestures, AT&T was the most indebted company in the world. Not surprisingly, AT&T had to slash its dividend given its huge obligations, rising interest rates and the firm’s inability to grow profits. AT&T has repeatedly demonstrated that it is among those dividend stocks you will want to avoid.

Campbell Soup (CPB)

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Many investors have long relied on food and beverage companies to be a mainstay in their retirement portfolios. And with good reason; everyone has to eat, and the food industry has long-running brands with solid pricing power and strong consumer loyalty.

But not all food companies are created equal. While some firms have successfully updated their brand portfolios to reflect the food and nutrition preferences of younger demographics, others have largely gotten stuck in place.

Campbell Soup (NYSE:CPB), for example, hasn’t even kept up with inflation in recent years. In fiscal year 2014, it generated $8.3 billion in revenues. In its already completed fiscal year 2023, it generated $9.4 billion in revenues. That makes for an anemic 1.5% annualized revenue growth rate. It seems Campbell’s product line-up has not shown much resonance with younger or more health-conscious consumers.

Ultimately, companies need to grow their sales and profits to deliver increasing dividends. And, in the current interest rate environment, CPB stock’s starting 3.7% dividend yield simply isn’t high enough given the almost complete lack of growth in its business over the past decade.

Franklin Resources (BEN)

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Franklin Resources (NYSE:BEN) is an asset manager that offers mutual funds and other financial products for investors. The firm has significant operating scale, with $1.33 trillion in assets primarily located in the firm’s equity and fixed income operations.

That size might seem to make BEN stock a reliable retirement pick. However, mutual funds are under heavy competitive pressure.

The rise of low-cost index funds has given investors a popular alternative to traditional mutual funds, and as a result, mutual funds have seen steady outflows since 2006 onward. Over time, as more and more investors funds move from Franklin products into index funds, that will pressure the firm’s profits. Additionally, fees have been trending downward across the industry, further limiting Franklin’s prospects.

Franklin generated $8.5 billion in revenues back in 2014 and just $7.8 billion over the past 12 months. Earnings per share have also fallen significantly over the past decade. This is a slowly eroding business given market conditions. The 5.2% dividend yield may seem nice, but there will be minimal growth; in fact, if current trends persist, there may even be a dividend cut in future years.

Medical Properties Trust (MPW)

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After a company slashes its dividend once, investors should be on high alert, because there’s often another cut in the works.

Medical Property Trust (NYSE:MPW) is one such example. The hospital-focused REIT was a popular stock with income investors over the past year due to its jaw-droppingly high dividend yield, often north of 12%.

However, I’ve been a frequent skeptic of the company given its complicated accounting and the numerous problems that its key tenants are facing. Simply put, much of the hospital sector has struggled to adapt to the post-pandemic operating landscape. And Medical Properties Trust’s selection of more marginal hospitals and tenants are not in good health right now.

MPW stock crashed once again last week, hitting fresh multi-year lows. Investment analyst firm Stifel cut its rating from buy to hold on the company citing asset sale delays, tenants not fully paying their bills, and MPW’s high cost of capital.

Even after its first dividend cut, MPW stock is yielding 14% once again. That might seem appealing. However, given their most challenging financial outlook, another dividend cut seems to be the most likely scenario here, and thus the share price should continue to decline. Smart investors will want to avoid placing MPW among the other dividend stocks in their portfolio.

Host Hotels & Resorts (HST)

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Host Hotels & Resorts (NYSE:HST) is a hotel REIT focused on upscale properties in big cities and resort locations. It controls 77 hotels with more than 40,000 hotel rooms in total.

HST stock slipped below $10 during the early days of the pandemic. However, it has now rebounded to more than $16 a share, on par with where it was before COVID-19, thanks to the resurgence in leisure travel over the past two years.

However, the coast isn’t necessarily clear for Host. The business travel market remains significantly impaired as many kinds of business meetings are now happening remotely. And the upturn in the leisure travel market seems to be slowing down. We’ve seen sharp sell-offs in the airline industry as consumers struggle with inflation and higher interest rates. This weakness could easily spread to hotel stocks such as Host.

Macy’s (M)

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Macy’s (NYSE:M) is one of America’s leading department store chains. Thirty years ago, department stores were a booming industry as Americans raced to buy the latest goods at their local mall.

However, time has not been kind to department stores. Numerous chains including heavyweights like Sears and J.C. Penney went bust and wiped out their former stockowners.

In doing so, it has brought down the whole mall ecosystem. Malls rely on huge anchor tenants, like J.C. Penney or Macy’s, to draw shoppers to the property and bring in foot traffic. That model has broken down as much of that buying power has migrated to e-commerce or big box stores.

Macy’s looks exceptionally cheap based on its trailing earnings results. But that is likely inflated by 2022’s historic shopping boom which now seems to be drawing to a close. The long-term story is that malls are in decline and Macy’s will need to invest its capital wisely to try to survive in this perilous landscape. Macy’s 6% dividend yield is likely to be a low priority, and I expect management to slash that yield during the next recession.

Ford Motor (F)

Source: Ford

Iconic automaker Ford Motor (NYSE:F) is selling for just six times forward earnings. And it offers a 6% dividend yield. So why is Ford a retirement stock to avoid?

The auto industry has proven highly cyclical and not recession-proof. In fact, bankruptcies have often rocked the industry during economic downturns. Given how much Ford and other automakers engage in financing for consumers, it puts them at risk if credit quality issues spring up.

It is also an expensive process to switch from primarily internal combustion engines to electric vehicles, and new entrants such as Tesla (NASDAQ:TSLA) will pressure profit margins. Throw in the recent autoworkers strike, which resulted in sharply higher labor costs, and Ford is facing a difficult operating outlook if a recession hits in 2024. Ford may work out if things go right, but it’s among the dividend stocks to avoid which could leave retirement portfolios in peril.

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.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.

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