While high-yielding dividend stocks may provide the security investors want at this time, many of them could be dividend traps. These stocks come with high yields that are unlikely to be sustainable over the long term.There could also be a situation where a company may be paying more dividends than its net income. Though such a scenario may be possible when investor sentiment is high, these companies are likely to cut or suspend their dividends in the current downturn. Therefore, the return isn’t worth the investment. Having said that, let’s look at seven dividend stocks to avoid now.
Healthcare Services Group
Vulcan Materials (VMC)
One of the stop dividend stocks to avoid now is Vulcan Materials (NYSE:VMC), one of the biggest names in the U.S. construction industry. It is the country’s largest producer of construction aggregates such as gravel and crushed stone. VMC boasts a relatively strong track record of growing its sales and rewarding its shareholders in the process. However, its lofty valuation and the headwinds in the construction space make it an unattractive bet at this point. Moreover, its dividend yield of less than 1% is significantly lower than its peers, which trade at more attractive valuations.
Perhaps the obvious knock-on VMC is the incredible slowdown in housing and non-residential construction. Interest rates have damped market expectations, and homebuilder confidence is far lower than it was several months ago. VMC’s bottom line has suffered immensely, with its costs rising at a relentless pace. Therefore, it’s tough to wager on VMC, given the headwinds it faces at this time.
Big Lots (BIG)
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Big Lots (NYSE:BIG) saw its shares skyrocket during the pandemic years. Big-box retailers such as BIG got a tremendous boost from the pandemic-led tailwinds in 2020, which continued the following year. However, the economic situation has changed dramatically over the past several months. It’s another one of the top dividend stocks to avoid now. Record-high inflation rates have weighed down margins and demand. Profitability metrics for Big Lots are down in the doldrums, with its trailing twelve-month EBIT margin at a negative 0.5%. Conditions will only worsen for the retail sector, and the firm’s management will likely slash its dividend payout. Therefore, it’s one of the more risky dividend bets at this time.
Camping World (CWH)
Camping World (NYSE:CWH) is a leading recreational vehicle retailer with a healthy market share in the niche. It also provides RV-related services that have helped improve its margins and expand its revenue base. Its business has outperformed the market over the past several years, growing its top line by a tremendous 14% over a five-year period. Moreover, it also offers an eye-catching dividend yield of roughly 9%.
Given the current economic conditions and the pandemic in the rear-view mirror, RV demand is likely to drop substantially in the coming months. In fact, according to a Baird report, recreational vehicle sales plummeted 19% in August. Moreover, RV wholesale shipments dropped 36% in the same month. With interest rates and gas prices rising rapidly over the past several months, the situation should only worsen from here.
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Harley-Davidson (NYSE:HOG) is one of the most popular American motorcycle businesses founded back in 1903. Though the company boasts incredible brand equity, its revenue growth has been in the negative over the past five years. Moreover, it’s entering a major rebranding period, which spells trouble for its investors. HOG recently spun off its LiveWire electric motorcycle division to kickstart its revamp. However, the process will take a lot of time, which points to negative earnings growth over the next few years. Also, its dividend profile isn’t the most impressive, considering its 5-year growth rate is at a negative 15.6%. Moreover, it faces troubling economic conditions, weakening its business further, and makes this list of dividend stocks to avoid now.
Joann Inc. (JOAN)
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Joann Inc. (NASDAQ:JOAN) is a sewing and fabric supplies retailer that rode a wave of growth in the past couple of years. It benefitted from lockdown restrictions, boosting top-line growth leading up to its IPO last year. On the flip side, financial and operating performance over the past year pushed JOAN stock to new lows. The firm has suffered significantly from supply chain disruptions that have hit profitability and inventory availability. Moreover, higher import costs have resulted in massive pressures impacting the company’s profits and financial flexibility. Profitability metrics are firmly in the red, with return on common equity at a deplorable negative 59% in the past 12 months. Moreover, its debt is approximately 38 times its equity, which poses serious questions about its future outlook.
Healthcare Services Group (HCSG)
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Healthcare Services Group (NASDAQ:HCSG) provides housekeeping and dietary services to hospitals and nursing homes. Its business has struggled to grow sales over the past few years, with the pandemic further complicating its plight. Moreover, it is paying out a dividend that far exceeds earnings. Given the challenging economic climate, it’s tough to see how HCSG could maintain its payout.
HCSG stock trades at a pricey multiple of over 38 times forward earnings despite its lackluster financial performance. Though its stock has dropped considerably of late, it still trades close to its historical multiples. Even if the firm mounts a comeback in the upcoming months, the discrepancy between its dividend payout and earnings will likely continue. Therefore, it’s best to avoid investing in the stock at this time.
National CineMedia (NCMI)
National CineMedia (NASDAQ:NCMI) is a troubled movie theater advertising business that is perhaps the best example of a dividend trap. Its business slumped during the pandemic, in line with its peers in the movie theatre industry. It was forced to slash its dividends, and since early 2020, its payout has decreased from 19 cents to just three cents at this time.
Moreover, the firm is carrying over $800 million in outstanding debt, which its management is looking to restructure. Hence, it may have to slash its payout to zero to continue being solvent. Also, restructuring measures are likely to dilute shareholders.
Though revenue growth has improved post-pandemic, NCMI needs a lot more inflows to get out of trouble. Its share price has tanked and now trades for just chump change. Additionally, streaming services face intense competition, which continues to chomp away at their market share.
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
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.
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