With their steady payouts providing the potential for strong long-term returns, dividend stocks make for great portfolio holdings, in both bull and bear markets. However, just like with any categories of stocks, there are plenty of dividend stocks to avoid.
Many of these are so-called “dividend traps” or “yield traps.”
These are dividend stocks that are at high risk of reducing/suspending their payouts. Because of this risk, the market has priced these stocks in a way that gives them very high dividend yields. While enticing, this is a typical caveat with stocks with double-digit dividend yields.
Alongside this, there are other dividend stocks that, while not necessarily at risk of a dividend cut, have downside risk that outweigh their respective high (and in some cases, not so high) payouts.
Put simply, there are many dividend plays that are potentially hazardous to your portfolio, such as these seven dividend stocks to avoid. Each one earns an F rating in Portfolio Grader.
|ACP||Abrdn Income Credit Strategies Fund||$8.36|
|AEF||Abrdn Emerging Markets Equity Income Fund||$5.49|
|AFB||AllianceBernstein National Municipal Income Fund||$10.64|
|AFT||Apollo Senior Floating Rate Fund||$13.53|
|AGD||Abrdn Global Dynamic Dividend Fund||$0.65|
Abrdn Income Credit Strategies Fund (ACP)
Closed-end funds (or CEFs), like the Abrdn Income Credit Strategies Fund (NYSE:ACP) are popular with dividend-focused investors. Many of them offer very high yields.
Yet while the high forward dividend yield of ACP stock (14.35%) may pique your interest, the market hasn’t made a mistake in de-rating ACP to such a high yield.
Over the past year, shares in this CEF have fallen by more than 20%. Further declines may be ahead for two reasons.
First, the prospect of the Fed continuing to raise interest rates, as it attempts to bring down high inflation. Higher rates have an inverse effect on the value of ACP’s portfolio of low-rated debt securities.
Second, the current economic downturn could increase the default risk of ACP’s holdings. This may also result in another dividend cut, like the one 16.7% cut implemented in 2020. ACP earns an F rating in Portfolio Grader.
Adeia (NASDAQ:ADEA) may have a fairly low forward dividend yield (1.89%), but taking into account downside risk, not just dividend cut risk, ADEA is definitely one of the dividend stocks to avoid.
Sell-side analysts anticipate ADEA’s earnings will fall by nearly 30% this year. It’s questionable whether this intellectual property licensing firm can maintain its current rate of payout.
Although the company has presented to investors a plan to grow and maximize the value of its patent portfolio, this may prove to be easier said than-done.
If Adeia fails to get back into growth mode, not only could its payout get cut to ribbons. This may result in a steady decline for ADEA stock as well. Currently earning an F rating in Portfolio Grader, staying away is your best move when it comes to ADEA.
Abrdn Emerging Markets Equity Income Fund (AEF)
As you can likely tell, Abrdn Emerging Markets Equity Income Fund (NYSEAMERICAN:AEF) is another CEF.
Yet while AEF may have a smaller forward yield (6.6%) than ACP’s double-digit rate of payout mentioned above, don’t assume AEF’s payout is safe.
This CEF, which holds a basket of major international stocks, is both at risk of a dividend cut, and another big reduction in its valuation, even after sliding by nearly a quarter over the past twelve months. Mostly, due to the further downside risk with many of its top stock holdings.
A good example is Taiwan Semiconductor (NYSE:TSM). This stock is AEF’s largest holding, with 6.82% of the fund’s assets invested in the chipmaker.
As you may have heard, Warren Buffett recently reduced Berkshire Hathaway’s (NYSE:BRK.A,NYSE:BRK.B) position in TSM by 86%. AEF stock earns an F rating in Portfolio Grader.
AllianceBernstein National Municipal Income Fund (AFB)
As a municipal bond-focused CEF, AllianceBernstein National Municipal Income Fund (NYSE:AFB) may at first seem like a better choice than ACP or AEF.
Unfortunately, while municipal bonds do have advantages like preferential tax treatment, don’t assume they are a financial instrument free of risk.
Default risk and interest rate risks are par for the course with municipal bond investments, and with AFB in particular.
In terms of default risk, nearly 27% of the portfolio is invested in riskier municipal bonds (credit rating of BBB or lower). Obligations from the U.S. state with the lowest credit rating (Illinois) make up 11.6% of the portfolio.
In terms of rate risk, again rising rates push down the price of fixed-income securities. Even if its 3.68% dividend yield isn’t under threat, the further downside with F-rated AFB stock makes it one of the dividend stocks to avoid.
Apollo Senior Floating Rate Fund (AFT)
If you are an investor looking to generate a steady stream of income from your portfolio, I can see why you may be interested in the Apollo Senior Floating Rate Fund (NYSE:AFT).
Not only does AFT sport a forward dividend yield of over 10%. This credit-focused CEF pays out this dividend on a monthly rather than quarterly basis.
AFT has even raised its payout twice in just over a year, as with its focus on floating rate debt securities, the fund benefits from the Fed’s rate hikes.
However, despite all these qualities, I would skip AFT stock. Mostly, because of the riskiness of its loan portfolio.
With all of its debt holdings rated below investment grade, if current economic challenges worsen, default rates could rise. Besides potentially pushing this F-rated dividend stock lower, rising default rates could have a negative impact on the dividend.
Abrdn Global Dynamic Dividend Fund (AGD)
Abrdn Global Dynamic Dividend Fund (NYSE:AGD) holds a portfolio of shares in large global companies, paying out a steady 7 cent per share dividend monthly to investors. AGD has maintained this same level of payout since mid-2015.
AGD has pending mergers with two other closed end funds: the Delaware Investments Dividend and Income Fund (NSE:DDF), and the Delaware Enhanced Global Dividend and Income (NYSE:DEX). Given both DDF and DEX trade at discounts to their net asset values (or NAV) that are similar to AGD’s current NAV discount, these transactions are not necessarily bad news for AGD stock.
Still, there is something that makes one of the dividend stocks to avoid: underperformance.
With its total returns (dividends plus appreciation) lagging the S&P 500 by a wide margin over the past decade, investors seeking broad equity exposure and/or income have better options than this F-rated CEF.
Previously, investors who have bought AT&T (NYSE:T) for its high yield have been burned by a continued slide in price, plus a much-publicized dividend cut that happened after the telecom giant’s divestiture of its media business.
However, if you think that the days of T stock being a dividend trap are in the past, think again.
Even as sentiment for “Ma Bell” has improved since the start of the year, thanks to a strong earnings report, and upbeat remarks from CFO Pascal Desroches regarding the security of its 5.71% dividend, this stock could still continue to deliver poor total returns to investors.
Why? The company itself has stated that it expects the macro environment to remain “challenging” in the near term. Although it reported strong numbers for the last quarter, a similar situation may not play out in the quarters ahead. T earns an F rating in Portfolio Grader.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.