When things go well, dividend stocks can generate steady gains while providing cash flow for investors. Ideally, corporations raise their dividends every year and deliver long-term returns for investors.
However, the presence of index funds and thousands of publicly traded corporations should invite investors to be more selective about their assets. Some dividend stocks will get left in the dust and outperformed by indices. Even if a stock stays relatively flat and still gives out cash flow, your long-term gains are probably falling behind inflation.
The Core Personal Consumption Expenditures Price Index (PCE) increased by 2.6% year-over-year (YOY) in May. This reading indicates that inflation is cooling, but it also means a dividend stock must yield more than 2.6% to beat inflation. Some dividend stocks yield less than 1% but comfortably outperform the stock market. However, other dividend stocks offer high yields without much beyond that.
These are some of the dividend stocks to sell in July before they get worse and fall behind the stock market.
Target (TGT)
Target (NYSE:TGT) is up by 3% year-to-date (YTD) but are in the middle of a sharp correction. The retailer’s stock has rallied sharply since November 2023, yet the stock now looks overextended. While inflation is cooling, consumers are still grappling with tight budgets. Target has been affected and recently cut prices on 5,000 items to bring back shoppers.
Sales dropped by 3.2% YOY in the first quarter as comparable store sales dipped by 3.7% YOY. Target anticipates delivering 0% to 2% sales growth throughout 2024. Low revenue growth rates put a cap on income growth, especially in a business model that is known for low profit margins. Target is no tech company, and it only delivered a 3.8% net profit margin in the first quarter. It’s unlikely for profit margins to meaningfully grow while revenue growth remains flat.
Another concerning sign is the company’s meager 1.8% dividend hike. This low growth rate demonstrates Target is doing the minimum to keep dividend investors on board. Dividend growth has been negligible each year since 2022. Corporations only slow down their dividend growth rates if the business model is slowing down. It’s not a good development for long-term investors.
Coca-Cola (KO)
Coca-Cola (NYSE:KO) needed a mid-April surge to log a 6% YTD gain. Shares are up by only 25% over the past five years and have woefully underperformed the S&P 500 and the Nasdaq Composite. Those indices have 5-year gains of 86% and 121%, respectively. The stock has a 3.05% yield. However, inflation has chipped away at most of the dividend, and that’s before you pay taxes on it.
The soft drinks company has a 25.5 P/E ratio, which looks elevated relative to its recent financial performance. Coca-Cola reported just a 3% YOY revenue growth in the first quarter of 2024. Net income growth was even worse, coming in at 2% YOY. Coca-Cola closed the quarter with an impressive 28.1% net profit margin, but slow growth still doesn’t warrant the valuation.
For comparison, Meta Platforms (NASDAQ:META) has a 29 P/E ratio and more than doubled its net income in the first quarter of 2024 while maintaining 27% YOY revenue growth. Meta Platforms’ success and valuation help to demonstrate why Coca-Cola appears overvalued in comparison.
eBay (EBAY)
eBay (NASDAQ:EBAY) is having a good year. It’s up by 22% YTD and only has an 11 P/E ratio, but a closer look indicates some issues. eBay has been up by just 36% over the past five years, which indicates a history of underperformance. Furthermore, the stock’s 2.01% yield does not keep up with inflation.
The company’s financial growth doesn’t inspire much confidence. Revenue only grew by 2% YOY in the first quarter while gross merchandise volume was only up by 1% YOY. Net income dropped by 23% YOY. Also, the company’s recent decision to stop accepting American Express (NYSE:AXP) cards can impact its business in future quarters. While this impact shouldn’t be massive, eBay can’t afford to lose any growth at current levels.
Therefore, Wall Street analysts are lukewarm about the stock. It’s only rated as a moderate buy with a projected 1% upside. The lowest price target of $45 per share suggests that shares can fall by an additional 17%.
On the date of publication, Marc Guberti 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.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.