7 Dividend Traps to Avoid: Unmasking Risky Stocks With Shaky Business Outlooks

Dividend stocks tend to be a strong equity subclass for investment in general. Most stocks that pay dividends tend to be stable because consistently returning earnings to shareholders is not always possible in weaker companies. That includes the companies listed as some of the top dividend stocks to avoid. Over time a healthy payout range between 35-55% of earnings has emerged. That’s a reasonable guideline from which to screen companies though many exceptions to the rule exist. Likewise, investors also consider dividend yields – annual dividends/price – when investing in income stocks. It changes as the price fluctuates so it’s a good idea to consider the payout ratio in conjunction with yields. That said, yields exceeding 5-6% tend to raise red flags. 

In fact, here are just a few of the top dividend stocks to avoid in 2023.

Dividend Stocks to Avoid: Big Lots (BIG)

Big Lots (NYSE:BIG) had a tough 2022 with an extremely difficult consumer environment. However, it did promise to improve its business in the second half of 2023 and take the stock higher. In other words, Big Lots expects that it can turn its floundering retail business around as consumer spending remains weak. However, that’s a difficult proposition to get behind with your investment capital. After all, Big Lots’ net sales declined by 10.9% in Q4 YoY leading to a $2.334 million net operating loss. The dividend is excessively high to entice investor capital into the firm. It looks like a trap given the notion that Big Lots is a weak business that won’t be able to utilize that capital to affect a turnaround. 

Dividend Stocks to Avoid: BCE (BCE)

BCE (NYSE:BCE) stock is one of Canada’s largest communications companies. The firm’s fiber and wireless networks are ubiquitous across the nation as are its 4G, 5G, and Internet services. Its retail shops are equally prominent. Overall that might lead investors to believe that such a large firm would be stable and well-run. 

Unfortunately, things aren’t particularly stable for BCE. That truth is very evident as it pertains to the company’s dividend payout ratio — which sits at 1.23 at the moment. Remember, a ratio between 0.35 to 0.55 is generally considered healthy. That indicates healthy firms pay between 35-55% of their earnings as dividends. The remaining 45-65% is invested back into the company in order to promote future growth. 

A 1.23 payout ratio is unsustainable. BCE is paying 123% of earnings back to investors. Its earnings don’t cover dividend payments so it has to find the additional 23% from elsewhere. It’s a case of being stuck between a rock and a hard place because a dividend reduction to a sustainable level looks even worse to investors. 

Dividend Stocks to Avoid: Enviva (EVA)

The fundamentals underpinning Enviva (NYSE:EVA) stock aren’t encouraging. The company is the world’s largest industrial wood pellet producer with 10 plants throughout the Mid-Atlantic and South. But business trajectory, an inability to create value, and an excessively high dividend make it a sell. 

Enviva’s business has essentially been flat over the past 2 years with $1.04 billion in revenues in 2021 and $1.09 billion in 2022. It lost $145 million in 2021 which grew to a $168 million loss in 2022. The firm anticipates its 2023 loss will be between $18-48 million. 

Generally, shrinking losses are a strong sign. However, Enviva is weak financially and especially poor at creating value. Value creation is defined as the ability to take capital at a given rate and turn it into a greater sum of capital. A company with a higher return on invested capital (WACC) than its weighted average cost of capital (WACC) is one that creates value. Enviva is especially poor in this regard with a -4.56% ROIC and an 8.34% WACC. It makes sense then that Enviva entices investors with a dividend yielding more than 15%. 

Kronos (KRO)

Kronos (NYSE:KRO) makes titanium dioxide, an industrial pigment with applications across many industries and every corner of the globe. Generally speaking, boring companies with long histories like Kronos tend to perform steadily. But Kronos is headed in the wrong direction and its dividend is too expensive. 

Companywide sales fell to $1.93 billion in 2022, not far below the $1.939 in 2021 sales. Arguably the company didn’t do that poorly considering the global headwinds facing economies everywhere. But Q4 was like slamming into a brick wall for Kronos, registering a 31% drop in sales year-over-year. Lower sales and higher costs combined to create a $19.7 net loss in Q4. Kronos had been sustaining net gains prior. 

The dividend is yielding above 8% but that’s simply a function of falling prices. 8% is generally considered risky. However, the risk is more closely correlated with payout ratios which are also high at 0.84 for Kronos. The company last reduced the dividend in 2010 and when trouble arises, like it just did – companies enact dividend reductions. 

PetMed Express (PETS)

PetMed Express (NASDAQ:PETS) seems like a reasonable stock to invest in. The pet care industry only continues to grow and Americans spend $124 billion collectively on our pets. Vet bills are expensive and medication to keep Fido healthy is no joke. PetMed Express then should be capable of carving a nice business out of that collective pie, right?

It really depends on how you look at it. The company has been very adept at creating value. It returns more than 27% on the capital which costs it a bit more than 4%. A cynic could counter that it’s fairly easy to scalp pet owners through high-priced medication. Thus, it’s fairly easy to create massive returns in this industry. The massive margins are certainly a big part of the allure of competing in the industry. 

However, things are slipping at PetMed Express and average revenue per share has declined by 1% annually over the past 3 years. That makes it more difficult to pay dividends to shareholders which are currently 2.14X earnings. 

TELUS (TU)

Canadian telecom stock TELUS (NYSE:TU) is headed in the wrong direction even as it grows. The company isn’t doing poorly from a top-line perspective. Instead, operating revenues increased by 12.6% in the most recent quarter and overall revenues by 3.8%. Subscriptions increased by 6.4% in Q4 YoY. 

But at the same time, it’s evident that issues are beginning to pile up at the company. Those issues are going to directly impact its dividend sooner or later. As it currently stands, TELUS’ dividend payout ratio of 1.18 is unsustainable. Dipping back into company coffers to pay that extra 18% is not good business. The company needs to increase its earnings overall and in doing so that ratio will fall. 

Unfortunately, that is the opposite of what is currently happening. TELUS’ EPS decreased by 63.8% in the fourth quarter, falling to $0.17 a share. Lower earnings paired with unchanged obligations result in weakening firmwide prospects. And that puts the dividend at risk of reduction. 

Intel (INTC)

In all likelihood, Intel (NASDAQ:INTC) is probably the least likely company on this list to reduce the dividend on its stocks. It maintains a market capitalization of $134 billion currently and is a massive and important company even as it slides. It hasn’t reduced its dividend since 1992 so if it did it would be a major story that would tarnish the company. 

Again, it’s a highly unlikely event. The company’s earnings more than cover its dividend obligations which further suggests its continued payment in full. 

But that’s not really the point here. The point is that Intel is getting worse. 2022 revenues fell by $63.1 billion, or 20% YoY. In Q4 it was even worse with a 32% decline. The powers that be would love for Intel to actually affect a turnaround as reshoring efforts continue to ramp up. But that seems like a tenuous proposition and for investors, their only consolation is a measly dividend with a low yield. 

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.