4 Dividend Stocks to Avoid — and 3 to Buy Instead

The conversation surrounding which dividend stocks to buy and which to avoid centers on a wobbly economy. The failures of banks including Silvergate Capital (NYSE:SI), Silicon Valley Bank (NASDAQ:SIVB), and Signature Bank (NASDAQ:SBNY) sent shockwaves rippling through the financial system. As a result, the potential for a financial crisis a-la 2008/2009 remains high. The FDIC has stepped in, and things appear calm, for the moment.

The FDIC has implicitly guaranteed all uninsured deposits. That effectively subverts risk altogether which has caused multiple banks teetering on the brink of failure to rebound. However, I’d avoid the weakest large and regional banks.

Further, there are other economic issues afoot. Consumer spending remains volatile, as does commercial real estate. Dividend stocks in those sectors are highly risky currently.

That said, the strongest big banks look like good opportunities as customers flock to safety.

Wells Fargo (WFC)

Wells Fargo (NYSE:WFC) is one of the largest banks in the U.S., boasting a market capitalization of around $145 billion. By some logic, Wells Fargo should be among the dividend stocks in a favorable position right now, as big banks appear to be bastions of safety relative to their regional peers.

The fact that Wells Fargo is among 4 banks that made $5 billion uninsured deposits each into First Republic Bank (NYSE:FRC) seems to strengthen that sentiment: It’s strong enough to contribute and act as an anchor for the overall banking system.

But despite Wells Fargo’s size and reputation due to that scale, there are lots of things not to like. Wells Fargo shouldn’t be judged currently solely based on its past transgressions. The firm’s fake account scandal is likely a thing of the past, even as it garners headlines in court recently.

But I do question whether a firm that set sales goals so high that workers were compelled to create fake accounts, is suddenly so different. Wells Fargo continues to have a less-than-stellar reputation, and it wouldn’t be surprising for material weaknesses to emerge again soon.

KeyCorp (KEY)

KeyCorp (NYSE:KEY) is a regional bank stock that was already facing trouble before regional banks were under such pointed scrutiny. Yes, like all banks, KeyCorp appears to be ‘safe’ following the FDIC interceding. But while that will temporarily prop it up, I still believe it’s a dividend stock to avoid.

The primary reason, outside of unknown instabilities, is its weak performance of late. In the fourth quarter, KeyCorp did not perform strongly. Earnings were below the low end of analysts’ expectations.

KeyCorp had interest rates on its side. The Federal Reserve pushed rates aggressively higher in 2022. That’s generally a boon to banks that benefit from higher interest income due to those higher rates. KeyCorp was no different, with $1.227 billion in net interest income in Q4, up 18.2%.

But it wasn’t enough. Total revenues fell 2.5% during the period. The overall effect here is simple: KEY stock could still have serious underlying issues that the FDIC can’t glaze over. And given Q4 performance was so weak, this doesn’t bode well for shareholders in the wake of so much market instability.

Simon Property Group (SPG)

Simon Property Group (NYSE:SPG) is a retail REIT that certainly is among the higher-yielding dividend stocks in the market, with a current yield of roughly 6.9%.

Many times, such high yields are enough to entice investors to investing their capital in these stocks. At the same, high yields correlate to greater risk, scaring capital away. I would suggest avoiding Simon Property Group, primarily because the company’s portfolio is heading into weakness.

The company leases malls and outlets along with mills. The reason to avoid SPG stock is simple: retail sales fell in February, signaling an increasingly weaker consumer. That weaker consumer, in turn, is less-likely to frequent Simon Property Group’s sites. That could lead to businesses in those malls and outlets shutting down, lowering revenues and increasing stress.

Lease income increased very slightly in 2022 for the company. Losses, however, grew from $8.01 million to $61.2 million. Thus, it’s probably best to stick with lower-risk dividend stocks as retail should weaken further.

Kilroy Realty Corp. (KRC)

Like SPG stock, Kilroy Realty Corp (NYSE:KRC) is a high-yield dividend REIT. And like SPG, Kilroy Realty Group is facing substantial headwinds. However, Kilroy Realty Group operates in the office REIT sector, so its difficulties differ from those in the retail sector.

In particular, Kilroy Realty looks suspect due to the geography of its holdings. Its portfolio includes substantial holdings in San Francisco and San Diego. San Francisco is of course home to Silicon Valley and the tech center of the U.S. It’s no secret that the region and industry are undergoing serious volatility at present. Layoffs in the tech sector are likely to continue at a rapid pace. Additionally, Silicon Valley Bank was the epicenter of banking failures that promised to burn through the banking system, had the FDIC not interceded.

There are too many unknowns right now to invest in KRC stock. Office REITs are facing serious issues as companies and employees battle over work-from-home return-to-office dynamics.

Philip Morris (PM)

Switching gears, Philip Morris (NYSE:PM) is a dividend stock investors should consider. Like other dividend stocks on this list, PM stock also offers a reasonably high 5.3% yield, nearer the higher end of the safe spectrum. I keep writing about Phillip Morris because I want investors to see what a strong opportunity it represents. Cigarette smoking is out of fashion, but Phillip Morris is in a strong position to fill the void.

The firm’s IQOS vape brand is one reason analysts like PM stock. Overall, smoke-free products currently account for nearly one-third of company revenues. That truth is part of the reason to preference Phillip Morris over other big tobacco stocks. Its competitors are having a more difficult time pivoting away from cigarettes as a revenue source. Yet, cigarette sales continue to trend downward as smoking has lost favor. That puts Phillip Morris in prime position.

The company acquired Swedish Match late last year. The snus and nicotine pouch manufacturer has grown even faster than the company overall and should help the firm push its lead further ahead of lagging competitors.

Bank of America (BAC)

Bank of America (NYSE:BAC) may continue to be among the winners, as far as dividend stocks in the banking sector are concerned, over the next few weeks. Bank of America is among the better-regarded of the large banks, meaning it will benefit for some time. Dividend investors should also know that BAC’s 3.2% dividend yield sits right in the sweet spot of providing enough income, without excessive risk.

Bank of America was one of those four banks mentioned above that deposited $5 billion into First Republic Bank to shore up its reserves. That’s a clear sign of its position as one of the most important pillars of the banking system. In fact, it’s the second-largest bank in the U.S., behind the last stock below.

If you have any confidence in the U.S. banking system, Bank of America is a clear choice right now.

JPMorgan Chase (JPM)

A recent article in Barron’s pointed out the advantages JPMorgan Chase (NYSE:JPM) stock offers following the recent meltdown. That article pointed to the company’s strong balance as an overarching reason it looks so appealing now. It’s the largest bank and has much stronger reserves than others. That’s especially true when compared to banks that recently fell.

The last financial crisis cemented new rules that mean big banks are better capitalized than they previously were. Regulations on smaller banks were rolled back recently, however. That certainly contributed to the meltdown, sure. But it also makes the big banks look extra safe at this moment. And that’s going to benefit the #1 and #2 banks for some time.

The overarching idea is that JPMorgan has an excellent opportunity to increase its leading position right now. We’ve all read and heard about depositors flocking to Chase bank to put their money where it’s safest. That is going to allow the company to grow in ways it couldn’t have expected just a week ago.

On the date of publication, Alex Sirois 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.