April was forgettable, to say the least, for the stock market. Not only was it the worst month of the year, but it was also the worst month since February 2023. Hence, investors’ focus now shifts to income stocks, potentially offering a safe harbor amidst the volatility. However, it’s imperative not to act impulsively and avoid wagering on dividend stocks to sell.
Not all dividend stocks are created equal. Investors need to exercise caution and sidestep dividend traps, which can entice them with lofty yields. There’s usually a caveat with high-yielding companies as they often aren’t in a good financial position to sustain those dividends. Plus, there are many nuances to consider; for instance, since 1930, stocks with the highest dividends have generally matched the total returns of those with high but not the highest dividends. On that note, here are three dividend stocks to sell with multiple red flags you can’t ignore.
Dividend Stocks to Sell: Trend Micro (TMICY)
Trend Micro (OTCMKTS:TMICY) is a Japanese cybersecurity play that’s been mostly in the news over the past year for the wrong reasons. With a considerable slowdown in top-line growth and broader market headwinds, the firm laid off a significant percentage of its workforce. After laying off 7,582 employees in June last year, it announced a 2% reduction in its global workforce earlier this year.
Over the past four quarters, Trend Micro has missed top-line estimates by a significant margin in two of them. This, coupled with the fact that several of its core year-over-year (YOY) profitability metrics are lagging behind its five-year averages, raises concerns about the company’s stability and its ability to maintain its dividend.
The company’s dividend profile raises several red flags. After two years of dividend reduction, its 3-year dividend growth is a measly 0.6%. Moreover, its dividend payout ratio is an eye-watering 725%, which is incredibly unsustainable by any stretch.
PayPoint (PYPTF)
PayPoint (OTCMKTS:PYPTF) is a U.K.-based fintech platform that connects its customers with more than 60,000 retail partners and small businesses nationwide. It offers everything from secure mobile and multi-channel payment solutions to eCommerce integration.
It’s been growing rapidly of late, posting double-digit top-line expansion in recent quarters. Compared to the prior-year period, its group net sales jumped 34.1% to £79.8 million in the first half of fiscal 2024. Moreover, as per its recent trading update, the firm anticipates that its underlying EBITDA will be more than £80 million for fiscal year 2024.
However, there are a couple of concerning stats that warrant investor attention. For the half-year ended on September 30 2023, its cash generated metric was down 48% from the same period last year. Similarly, its net corporate debt ballooned 111% to £83.2 million. These results are likely to weigh down its already lackluster dividend profile, marked by three years of dividend reduction and an 87% payout ratio.
TFS Financial (TFSL)
TFS Financial (NASDAQ:TFSL) is a regional bank that attracted much attention last year following the Silicon Valley Bank debacle. Despite the choppiness, TFSL stock finished in the green last year, up 17%. However, year-to-date (YTD), the stock has dropped 10%, lagging broader market gains.
TFSL has a unique ownership structure, which takes the sheen off its dividend profile. It pays dividends to only its minority shareholders, representing just 19% of ownership. Moreover, this structure supports a high dividend yield of 8.53%, which questions the sustainability of such payments. Also, its payout ratio is over 400%, adding more weight to its bear case. Additionally, the regional bank has reduced its dividend payouts for a whopping 10 years.
Therefore, there’s not much to like about TFSL as an income stock. Also, heightened interest rates will lead to more loan defaults, which should continue weighing down the bank’s financial situation in the upcoming quarters.
On the date of publication, Muslim Farooque 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.
