Interest rates are soaring, the economy faces many challenges and the Federal Reserve remains aggressive in its campaign to stamp out inflation.
Amid this uncertainty, investors are turning to dividend stocks for solid income during these worrisome times. However, you should be careful when picking dividend stocks. Not all income yields are created equal.
In fact, in the case of these three dividend stocks to sell, trouble looms just over the horizon. It’s time to dump these three stocks before they cut their payouts and their share prices plunge.
AT&T (T)
Way back in 1993, AT&T (NYSE:T) traded for $15/share. At the time, it had a great position in landline telephony along with investments in emerging fields that would become the internet and mobile communications. AT&T shares would rally several times in the ensuing years as investors hoped AT&T would cash in on the new developments in the industry.
And yet, fast forward to today, and T stock trades for $15/share once again. The only meaningful return over that time came from the dividend. And even that is less generous than it used to be, as AT&T slashed its dividend in early 2022.
AT&T’s problems are mounting. Its huge debt load costs more than ever to serve its needs, given rising interest rates. The 5G rollouts were massively expensive and delivered only modest returns to date. And rising competition threatens to hurt pricing and reduce the firm’s cash flows.
Despite this, AT&T is a popular pick among dividend investors today. That’s a mistake. While AT&T is a blue chip stock based on its reputation, its falling cash flows and slumping dividends make this a stock worth avoiding today.
TriplePoint Venture Growth (TPVG)
TriplePoint Venture Growth (NYSE:TPVG) is a business development corporation (BDC) that primarily lends money to smaller growth-focused companies. Its largest lending categories are consumer products & services, e-commerce apparel, business applications and services, financial services and real estate services. Several of these industries are likely to face problems amid the current economic headwinds.
In its own words, TriplePoint’s lending solutions give it the “ability to grow faster, finance business expansion & extend runway — enabling companies to achieve more milestones and command a higher future valuation.” In theory, that gives companies a longer time period before issuing their initial public offering (IPO) or otherwise raising more capital. That’s great in bull markets.
However, I’d argue that with higher interest rates and the downturn in market sentiment, TriplePoint may see many of its companies fail to reach a successful IPO or SPAC exit. The market demand simply isn’t there like it was two years ago. That’s especially true in categories like real estate and unprofitable software companies right now.
TriplePoint looks highly alluring with its mid-single digit P/E ratio and 17.1% dividend yield. However, earnings only modestly cover the dividend today. Any unfavorable movements in interest rate spreads or rise in loan losses will likely lead to a dividend cut and a slumping stock price.
Best Buy (BBY)
Best Buy (NYSE:BBY) has done better than just about anyone would have reasonably expected. With the rise of Amazon (NASDAQ:AMZN), it seemed inevitable that most electronics shopping would move online. In categories such as software, games, movies and music, it’s hard for physical stores to compete with the internet’s far larger catalog.
And yet, via its focus on service and customer experience, Best Buy has managed to stay relevant. The company survived the 2008 financial crisis and enjoyed a decade of resounding prosperity. Its fortunes perked up once again in 2021 as consumers bought TVs, laptops and other digital gear at a record pace as they hunkered down at home during the pandemic.
However, the digital boom has now ended, and we are seeing a double-digit decline across many electronics categories this year. Meanwhile, e-commerce continues to be a major drag on sales and profit margins for physical electronics retailers.
Best Buy has done an admirable job staying in business where others, like RadioShack, were unable to survive. However, given fallen consumer electronics spending, inflation and the continued e-commerce threat, I’m skeptical Best Buy will see its profits remain at their currently lofty levels. When a recession hits, don’t be surprised if Best Buy chops its 5.4% dividend yield to save some much-needed cash.
On the date of publication, Ian Bezek did not hold (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.
