Dividend investing is a spectacular way of accumulating wealth, especially if you locate your dividend stocks in tax-efficient accounts. In fact, I’d argue that nimble dividend investing would beat capital gains investing in today’s economy.
Despite the allure of dividend investing, risks are ever-present. For example, many companies sustain their dividend payouts to satisfy investors while depleting their book values and, in turn, their stock’s fair value. Another risk worth considering is that some companies pay dividends instead of reinvesting in their businesses, consequently driving down their future growth prospects.
This article focuses on three dividend-boosting stocks that face price risk due to the aforementioned reasons. Let’s discuss each in depth.
Realty Income Corporation (O)
Realty Income Corporation (NYSE:O) isn’t a stock but instead a real estate investment trust (REIT). The REIT invests in retail properties located in the United States, United Kingdom and Europe. Realty Income Corporation’s property portfolio has yielded tremendous success, realizing 6.2% in annual funds from operations per share growth since 2012.
Although historically a solid income-based investment opportunity, O REIT’s recently announced 124th dividend increases could soon become a burden. What’s my basis? Well, O REIT faces systematic headwinds. For example, due to disinflation, U.S. retail capitalization rates are forecasted to recede. In addition, the Atlanta Federal Reserve’s GDPNow projects an economic slowdown to surface in late 2024, which may impair O REIT’s asset base.
Furthermore, O REIT has structural concerns. Realty Income released its fourth-quarter earnings last month, revealing a 20-basis-point quarterly drop in occupancy. In addition, O REIT raised $1.6 billion in common stock equity during its fourth quarter, raising concerns about its internal liquidity.
Lastly, key metrics suggest O REIT is fairly valued. In particular, its price-to-funds from operation ratio of 12.92x is above its five-year average of 12.55x. Moreover, its forward dividend yield of 5.86% will likely dent the REIT’s book value, given that O REIT’s funds available for distribution payout ratio is elevated at 76.10%.
It’s time to stay away from O REIT for the time being.
British American Tobacco (BTI)
I held an optimistic view of British American Tobacco (NYSE:BTI) stock for the better part of three years. However, I’ve given up on it as BTI faces numerous fundamental challenges. Moreover, the company’s poor environmental, social and governance (ESG) score adds synthetic demand-side concerns to its stock.
Let’s delve into a few of British American Tobacco’s fundamental headwinds to set a baseline.
British American Tobacco’s projected organic growth until 2026 sits between 3% and 5%. Sure, that sounds respectable, but the company’s real growth factor could be flat if inflation is backed out of the equation. Much of the firm’s slowing growth is due to softer consumption of combustible products and illicit trade in some of British American Tobacco’s primary sales areas. British American Tobacco is pivoting toward non-combustible products such as vapes and tobacco-free nicotine pouches. However, beware that numerous non-combustible products might be a temporary trend.
A newly announced $2 million investment in Open Book Extracts, a U.S.-based Cannabanoid manufacturer, highlights British American Tobacco’s pivot into modern growth industries. However, I’m worried about the company’s pivot. In truth, its contemporaneous dividend yield of 9.78% will likely coalesce with the aforementioned and drive its stock price down.
Euroseas (ESEA)
ESEA (NASDAQ:ESEA) stock has drifted up by nearly 30% in the past six months, but it’s time for mean reversion to play its hand. Euroseas, a Greek container shipping company, has a fleet of 20 vessels spanning feeder and intermediate containerships.
Although Euroseas is a promising shipping company, it is highly cyclical, meaning its stock fluctuates throughout the economic cycle. I foresee a slowdown in global shipping unfolding in late 2024 due to a blip in the economy and rising geopolitical tensions. Euroseases’ fourth-quarter results echoed my outlook as the firm missed its revenue target by $49.1 million amid subdued charter rates. Moreover, Euroseas’ earnings settled 24 cents below target, suggesting cost cutting is out of the equation for the time being. In essence, key variables indicate that Euroseas is due for a cyclical correction.
In fairness, Euroseas does reward its shareholders equitably. The company raised its dividend by 20%, resulting in a forward dividend yield of around 7.06%. However, its high dividend yield could be its downfall. Investors will likely capture this quarter’s dividend and divest from the stock due to cyclical concerns.
ESEA is too risky, in my view.
On the date of publication, Steve Booyens 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.
