All posts by Brian Bollinger

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Don’t Make This Buying Mistake

A Strategy for Buying Elite Businesses at Bargain Prices
The key is determining whether it’s TRULY a bargain — or deserves to be sold

By Brian Hunt, InvestorPlace CEO

Even elite businesses with juicy dividends suffer share price selloffs from time to time.

Sometimes, these selloffs are caused by short-term, solvable problems within the individual companies.

Sometimes, these selloffs are caused because the overall stock market goes down in value.

These selloffs are almost always opportunities to buy these firms at bargain prices and start collecting steady dividend payments.

When you spend money on any big purchase, like a home or a car, you want to pay a good price. You want to get value for your dollar.

When you buy a car, you want to pay a good price. When you buy a house, you want to pay a good price. You don’t want to overpay. You don’t want to embarrass yourself by getting ripped off.

Yet … when people invest, the idea of paying a good price is often cast aside. They get excited about a story they read in a magazine … or how much their brother-in-law is making in a stock, and they just buy it.

They don’t pay any attention to the price they’re paying … or the value they’re getting for their investment dollar.

Warren Buffett often repeats a valuable quote from investment legend Ben Graham: “Price is what you pay, value is what you get.”

I think that’s a great way to put it.

Like many investment concepts, it’s helpful to think of it in terms of real estate:

Let’s say there’s a great house in your neighborhood. It’s an attractive house with solid, modern construction and new appliances. It could bring in $30,000 per year in rent. This is the “gross” rental income … or the income you have before subtracting expenses.

If you could buy this house for just $120,000, it would be a good deal. Since $30,000 goes into $120,000 four times, you could get back your purchase price in gross rental income in just four years.

In this example, we’d say you’re paying “four times gross rental income.”

Now … let’s say you pay $600,000 for that house.

Since $30,000 goes into $600,000 20 times, you would get back your purchase price in gross rental income in 20 years.

In this example, we’d say you’re paying “20 times gross rental income.”

Paying $600,000 is obviously not as good a deal as paying just $120,000.

Remember, in this example, we’re talking about buying the same house.

We’re talking about the same amount of rental income.

In one case, you’re paying a good price. You’re getting a good deal. You’ll recoup your investment in gross rental income in just four years.

In the other case, you’re paying a lot more. You’re not getting a good deal. It will take you 20 years just to recoup your investment.

And it’s all a factor of the price you pay.

It works the same way when investing in a business …

You want to buy at a good price that allows you to get a good return on your investment. You want to avoid buying at a bloated, expensive price.

This is a vital point.

No matter, how great a business is, it can turn out to be a terrible investment if you pay the wrong price.

If you’re not clear on this point, please read through the home example again. When it comes to buying elite businesses that raise their dividends every year, you can use the company’s dividend yield to help you answer the important question: “Is this business trading for a good price or a bad price?”

Here’s how it works …

When a stock’s price goes down and the annual dividend remains the same, the dividend yield rises.

For example, let’s say a stock is $50 per share and pays a $2 per share annual dividend. This represents a yield of 4% (since 2 is 4% of 50).

If the stock declines to $40 per share and the dividend payment remains $2 per share, the stock will yield 5% (since 2 is 5% of 40).

When a selloff causes an elite dividend-payer to trade near the high end of its historical dividend yield range, it’s a bargain … and it’s a good idea to buy shares.

Remember, these companies pay the world’s most reliable dividends.

Their annual payouts only go one way — UP.

When an elite dividend-payer’s share price suffers a decline of more than 15%, consider it “on sale” and buy it.

For example, in the late 2008/early 2009 stock market decline, shares of elite dividend payer Procter & Gamble (NYSE: PG) fell from $65 to $45 (a decline of 30%).

Procter & Gamble is one of the world’s top consumer product businesses. Every year, it sells billions and billions of dollars’ worth of basic, everyday products like Gillette razors, Pampers diapers, Charmin toilet paper, Crest toothpaste, Bounty paper towels, and Tide laundry detergent. It has raised its dividend every year for more than 60 years.

Investors who stepped in to buy this high-quality business after the market decline could have purchased shares at $50.

In the five years that followed, Procter & Gamble climbed to $80 per share. Its annual dividend grew to $2.57 per share.

This annual dividend represented a 5.1% yield on a purchase price of $50 per share … and that yield will continue rising for many years.

Owning one of the world’s best businesses … earning a 5.1% yield on your shares … collecting a safe income stream that rises every year …

Buying the best at bargain prices is a beautiful thing.

If you have the interest, time and knowhow, you can track these businesses yourself. You can find all the information you need on many free financial websites.

Or, you can simply pay an advisor or research firm to do it for you. I’d be remiss not to invite you to check out Neil George’s picks. Neil can recommend plenty of elite dividend-payers, complete with buy-below prices.

Remember, you can make a bad investment in a great business if you pay a stupid price. View your investment purchases just like you would the purchase of a home, a car, or a computer.

Get good value for your investment dollar. And when an elite dividend-payer sells off for some reason, see it as an opportunity to buy quality at a bargain price.

Once you’ve got price on your side, you’ve got to put time on your side. Here’s how.

Regards,

Brian

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Dividends

10 Safe Dividend Stocks for the Second Quarter

Source: Shutterstock

With the U.S. stock market fresh off its first quarterly loss since 2015, many conservative  investors are in need of dividend stock ideas that can provide safe income and preserve their capital over the long term.

Using Dividend Safety Scores, a system created by Simply Safe Dividends to help investors avoid dividend cuts in their portfolios, we identified 10 high-quality dividend stocks from traditionally defensive sectors like telecom, healthcare and consumer staples.

These stocks have an impeccable record of paying continuous dividends over the years given their durable business models, strong cash flows and disciplined approach to capital allocation.

Many of these companies are also in Simply Safe Dividends’ list of the best high dividend stocks here and trade at yields above their five-year averages, providing an attractive combination of current income and growth.

Let’s take a look at 10 of the best safe dividend stocks for the second quarter.

Safe Dividend Stocks: AT&T (T)

Safe Dividend Stocks: AT&T (T)

Source: Mike Mozart via Flickr

Sector: Telecom Services
Industry: Integrated Telecommunication Services
Dividend Yield: 5.6%
5-Year Average Yield: 5.2%

AT&T Inc. (NYSE:T) is a global leader in telecommunications, media and technology. The company provides wireless and wireline communications services, including data, broadband and voice, digital video services, telecommunications equipment and other services.

AT&T has a huge customer base consisting of 157 million wireless subscribers, over 12 million internet subscribers and around 25 million video customers.

Few companies can compete with AT&T’s massive scale, which allows it to invest heavily in the quality and coverage of its cable, wireless, and satellite networks. In fact, AT&T is planning to deploy the next generation 5G wireless technology in 12 U.S. markets by late 2018.

Should AT&T’s acquisition of Time Warner be completed, the deal has potential to create value for shareholders and customers by combining its strong distribution capabilities with Time Warner’s large content portfolio.

While this deal will increase AT&T’s debt burden, Simply Safe Dividends estimates that the combined company’s free cash flow payout ratio will sit around 70% to 80%, which is sustainable for a cash cow with recession-resistant services like AT&T. Investors can read the firm’s in-depth dividend stock analysis on AT&T here.

AT&T has recorded 34 consecutive years of quarterly dividend growth and last raised its payout by 2% in late 2017. An improving balance sheet and moderately growing demand for faster delivery of video and data services should enable the company to continue raising its dividend at a low single-digit pace.

Safe Dividend Stocks: Pfizer (PFE)

Safe Dividend Stocks: Pfizer (PFE)

Source: Shutterstock

Sector: Healthcare
Industry: Pharmaceuticals
Dividend Yield: 3.8%
5-Year Average Yield: 3.5%

Pfizer Inc. (NYSE:PFE) is a global biopharmaceutical giant engaged in the development and manufacture of healthcare products. It is one of the largest global pharmaceuticals companies, with 2017 revenues exceeding $52 billion.

Founded in 1849, Pfizer has come a long way to become a leading healthcare company, with manufacturing sites in 63 locations and sales in 125 countries. The company has a wide portfolio of medicines, vaccines and consumer healthcare products and is known for popular drugs like Prevnar and Viagra, among others.

The company’s business can be divided into two distinct business segments — Pfizer Innovative Health (focusing on six therapeutic areas like oncology) which accounted for 60% of 2017 revenues and Pfizer Essential Health (legacy drugs that have lost patent protection) comprising the remaining 40%.

A relatively recession-proof business model, diversified portfolio of R&D intensive products, and global scale create a competitive moat around the company.

Pfizer is also benefiting from U.S. tax reform, which has driven the firm to repatriate most of its cash held overseas and aggressively return cash to shareholders.

The company last raised its dividend by 6.3% in December 2017, and mid-single-digit growth is likely to continue. In fact, management expects 11% earnings growth in 2018, and rising global demand for healthcare should continue to serve as a long-term tailwind.

Income investors can read Simply Safe Dividends’ comprehensive analysis on Pfizer’s business here.

Safe Dividend Stocks: Procter & Gamble (PG)

Safe Dividend Stocks: Procter & Gamble (PG)

Source: Mike Mozart via Flickr (Modified)

Sector: Consumer Staples
Industry: Household Products
Dividend Yield: 3.5%
5-Year Average Yield: 3.1%

Procter & Gamble Co (NYSE:PG) is a leading global consumer goods company. With more than 180 years of existence, the company is today an international household name, selling products in more than 175 countries.

Accounting for 32% of total sales in 2017, fabric and home care is Procter & Gamble’s biggest segment, followed by baby, feminine and family care (28%), beauty (18%), grooming (11%) and health (11%) segments.

By geography, North America is P&G’s largest market (45% of sales) while developing economies account for 35% of its total sales.

A diverse portfolio of iconic brands (Ariel, Bounty, Braun, Olay, Pantene etc.),  strong consumer loyalty, and a global sales network have made P&G one of strongest consumer goods companies in the world.

In recent years the company has restructured its brand portfolio (from 170 in 2013 to 65 today) to focus more on stronger product lines with faster growth and greater profitability. The company also has targeted to save $10 billion in operating costs between fiscal year 2017 and 2021.

Despite its modest growth profile, Procter & Gamble has an impeccable record of paying consecutive dividends over the last 127 years. It last raised its dividend by 3% in 2017, marking it the 61st consecutive dividend increase and reinforcing its status as a dividend king (see all the dividend kings here).

The company is targeting up to $70 billion in capital returns through fiscal 2019 and 5% to 7% in core earnings per share growth. This should enable the company to comfortably continue its dividend growth streak.

Safe Dividend Stocks: United Parcel Services (UPS)

Safe Dividend Stocks: United Parcel Services (UPS)

Source: Mike Mozart Via Flickr

Sector: Industrials
Industry: Air Freight and Logistics
Dividend Yield: 3.4%
5-Year Average Yield: 2.9%

United Parcel Service, Inc. (NYSE:UPS) is a holding in Warren Buffett’s dividend portfolio hereand is the world’s largest package delivery and logistics company. It is also a premier provider of global supply chain management solutions.

The company operates through three segments: U.S. Domestic Package (62% of 2017 revenue), International Package (20%) and Supply Chain & Freight (18%).

UPS has a balanced presence globally delivering 20 million packages and documents each day in more than 220 countries. The US is its largest market with 79% of sales while Europe is the largest among international markets (21%).

The company has an extensive global logistics and distribution system consisting of 2,500 worldwide operating facilities, 119,000 vehicles and over 500 aircraft. Upstarts and smaller rivals cannot afford to invest in such a transportation network, and they lack UPS’s package volumes which help the company achieve meaningful cost efficiencies.

Thanks to its advantages, UPS has been paying generous cash dividends for the last 50 years. The company’s recent payout boost in late 2017 represented a 10% increase over the prior year, and analysts expect 2018 adjusted diluted earnings per share to grow by 20% thanks largely to tax reform.

Given the continued surge in global online shopping trends and long-term growth in global trade, the company should be able to continue  increasing its dividend comfortably in the high single to low double-digit range.

Safe Dividend Stocks: Verizon Communications (VZ)

Safe Dividend Stocks: Verizon Communications (VZ)

Source: Mike Mozart Via Flickr

Sector: Telecom Services
Industry: Integrated Telecommunication Services
Dividend Yield: 4.9%
5-Year Average Yield: 4.5%

Verizon Communications Inc (NYSE:VZ) is the biggest provider of wireless service in the U.S. with 116.3 million retail customers and enjoys a duopoly position with AT&T, Sprint Corp (NYSE:S) and T-Mobile US Inc (NASDAQ:TMUS).

The company has the largest 4G LTE network (with 97.9 million retail postpaid connections) and is available to over 98% of the U.S. population. Although wireless operations generate over 80% of the company’s cash flow, Verizon’s superior fiber-optic technology also enables high speed broadband internet and has been ranked No.1 for internet speed ten years in a row by PC Magazine.

Customers prefer Verizon for its highly reliable wireless services, which are made possible by substantial investments in its network each year. The company also owns highly valuable and scarce telecom spectrum licenses, which form a strong entry barrier for new entrants.

Verizon is also leading the 5G wireless technology development over the last few years to reinforce its strong position, and it has plans to launch 5G wireless residential broadband services in three to five U.S. markets this year.

With tax reform freeing up several billion dollars more of cash flow this year, and management’s plans to cut $10 billion in costs by 2022, Verizon’s dividend remains on solid ground.

Verizon recorded its 11th consecutive dividend increase in 2017 with a 2.2% raise, and low-single-digit growth is likely to continue in the years ahead as the company trims its cost base and benefits from growing demand for high speed data and internet.

Safe Dividend Stocks: Coca-Cola (KO)

Safe Dividend Stocks: Coca-Cola (KO)

Source: Chris Nielsen via Flickr

Sector: Consumer Staples
Industry: Soft Drinks
Dividend Yield: 3.5%
5-Year Average Yield: 3.2%

The Coca-Cola Co (NYSE:KO) is one of the largest beverage companies in the world, manufacturing and distributing more than 500 non-alcoholic drink brands. It owns four of the world’s top five sparkling soft drink brands — Coca-Cola, Diet Coke, Fanta and Sprite.

Coca-Cola’s activities can be grouped into five operating segments — Europe, Middle East and Africa (21% of 2017 revenues); Latin America (11%); North America (24%); Asia Pacific (14%); and Bottling Investments (30%).

Coca-Cola owns the world’s largest distribution system that enables seamless sales to 27 million customer outlets in more than 200 international markets. This distribution network serves as a major advantage as the company evolves its product mix.

As a result of increased customer health awareness, the company is focusing on constructing a healthier portfolio by introducing products like Coca-Cola zero sugar.

The Coca-Cola Company is a dividend aristocrat (see all the aristocrats here) that has increased dividends in each of the last 56 years and last raised its payout by 5%. The company has a target of a 75% payout ratio and 7% to 9% earnings growth over the long term.

Given its industry leading position, strong brands, and huge international presence, Coca-Cola should be able to continue delivering mid-single-digit dividend growth in future.

Safe Dividend Stocks: Merck (MRK)

Safe Dividend Stocks: Merck (MRK)

Source: Shutterstock

Sector: Healthcare
Industry: Pharmaceuticals
Dividend Yield: 3.6%
5-Year Average Yield: 3.1%

Merck & Co., Inc. (NYSE:MRK) is a global healthcare company with a rich operating history exceeding 120 years. The company provides a host of prescription medicines, vaccines, biologic therapies and animal health products.

Geographically, the U.S. is its largest market with 43% of 2017 revenues, followed by EMEA, Asia Pacific, Japan, Latin America and others.

Merck’s core product categories include drugs for diabetes and cancer as well as vaccines and hospital acute care. A few of Merck’s best-selling products are Januvia (industry leading diabetic drug), Keytruda (cancer drug), Zetia and Remicade. The company’s 12 main drugs accounted for 53% of total sales in 2017.

The company spends heavily on R&D (18% of sales in 2017) to continuously rebuild its drug pipeline and deliver innovative health solutions. As a result, Merck is in a solid position to benefit from the growing demand for oncology treatments. The company has also been restructuring its business to cut long-term costs.

Merck has a rich history of paying uninterrupted dividends for nearly three decades and has increased dividends for seven years in a row. Its last dividend was raised by 2%, which is in line with its 10-year annual dividend growth rate.

Given the company’s disciplined capital allocation and reasonable payout ratio below 50%, Merck is poised to continue growing its payout in the future.

Safe Dividend Stocks: Altria (MO)

Safe Dividend Stocks: Altria (MO)

Source: Peyri Herrera via Flickr (Modified)

Sector: Consumer Staples
Industry: Tobacco
Dividend Yield: 4.4%
5-Year Average Yield: 4.0%

Altria Group Inc (NYSE:MO) is the undisputed market leader in the U.S. tobacco industry. The company has exclusive rights to sell cigarettes under a handful of leading brands including Marlboro, Virginia Slims, Parliament and Benson & Hedges. Altria also sells cigars, chewing tobacco and wine.

Marlboro has been the leading U.S. cigarette brand for over 40 years, and Copenhagen and Skoal account for more than 50% of the smokeless products category. Cigarette brands tend to have a high degree of stickiness, with customers having a very low preference to switch to other brands and a greater tolerance to pay higher prices given the addictive nature of tobacco.

With a long history of manufacturing cigarettes dating back 180 years, Altria has built a dominant market position over the years, resulting in a steady and growing stream of cash flow that has funded solid dividend growth.

In fact, Altria’s latest dividend raise earlier this year was 6%, representing its 52nd dividend increase in the past 49 years. Altria has a target dividend payout ratio of 80% with annual earnings growth of 7% to 9% expected over the long term. This should  allow the company to keep growing dividends at a mid to high single-digit clip going forward.

Safe Dividend Stocks: AbbVie (ABBV)

AbbVie Inc (NYSE:ABBV) is a research-driven global healthcare company, focusing on developing and delivering drugs in therapeutic areas like immunology, oncology, neuroscience, virology and general medicine. The company generates over 60% of its revenue (and an even greater share of profits) from its arthritis drug Humira.Sector: Healthcare
Industry: Biotechnology
Dividend Yield: 4.2%
5-Year Average Yield: 3.5%

Humira’s revenue stream in the U.S. is expected to be largely protected from competition through 2022 thanks to a number of patents owned by AbbVie. Meanwhile, AbbVie’s R&D expertise has helped the company develop a strong late-stage pipeline of promising medicines across several therapeutic areas which could potentially be converted into successful products in the near future.

The company recently experienced a setback as Rova-T, a lung cancer drug that was a key part of AbbVie’s plans to diversify its future profits, experienced achieved disappointing trial results, suggesting its overall impact on the company’s future results would be somewhat muted.

However, the company remains a cash cow with a handful of growth drivers and a reasonable payout ratio near 50%. Management continues cranking up the dividend, most recently announcing a 35% boost earlier this year.

New product launches and increasing demand for medicines both from developed and developing economies should help AbbVie grow its dividends at a solid rate going forward, but investors considering the stock do need to have a stomach for volatility given AbbVie’s drug concentration.

Safe Dividend Stocks: Cisco (CSCO)

Safe Dividend Stocks: Cisco Systems (CSCO)

Source: Prayitno via Flickr (Modified)

Sector: Information Technology
Industry: Communications Equipment
Dividend Yield: 3.2%
5-Year Average Yield: 3.2%

Cisco Systems, Inc. (NASDAQ:CSCO) is a leading global technology company inventing new technologies and products that have been powering the internet for more than three decades.

Product sales account for approximately 75% of total sales while services comprise the remainder of the business. Switching and routing are the most prominent product categories followed by collaboration, data center, wireless, security and service provider video.

The company’s service revenue is composed of software, subscriptions, and technical support offered across its different segments. Cisco’s customers are highly diversified and include businesses of all sizes, public institutions, governments and service providers.

Cisco has a large worldwide sales and marketing network with field offices in 95 countries, strong R&D capabilities, and a massive patent portfolio. Market leadership, breadth of portfolio, global scale and customer loyalty are its key competitive advantages. Investors can read in-depth analysis of Cisco’s business here.

Cisco is also shifting its business towards a software and subscriptions model which will lead to a higher visibility of its cash flows. Currently, recurring revenue accounts for 33% of total sales, and more than half of software revenue is subscription based revenue.

Cisco recently increased its dividend by 14% and has targeted to return at least half of its free cash flow to shareholders annually. The company’s solid cash flow and sub-50% payout ratio should allow for continued dividend growth in the years ahead.

Get up to 14 dividend paychecks per month from safe, reliable stocks with The Monthly Dividend Paycheck Calendar, an easy-to-use system that shows you which dividend stocks to pick, when to buy them, when you get paid your dividends, and how much.  All you have to do is buy the stocks you like and tell them where to send your dividend payments. For more information Click Here.

Source: Investors Alley 

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7 Dividend Stocks That May Be Hurting Your Retirement

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Two key goals in retirement are to generate safe income and preserve capital. No one wants to outlive their nest egg.

Dividend-paying stocks are a popular asset class used to generate predictable, growing income. However, unlike the interest income paid by government-backed Treasury bonds, a common stock dividend can be far more discretionary in nature. When times get tough, a business will typically opt to reduce its dividend before jeopardizing its ability to meet its debt obligations, preserve its credit rating or invest in its long-term growth projects.

Unfortunately, a number of businesses are facing the tough decision to reduce their dividend at any one moment.

To alert investors of stocks that have the highest risk of reducing their current dividend in the future, Simply Safe Dividends created a Dividend Safety Score system that analyzes a company’s payout ratios, debt levels, recession performance, cash flow generation, recent earnings performance, dividend longevity and more.

Dividend Safety Scores are available for thousands of stocks, and scores range from 0 to 100. A score of 50 represents a borderline safe payout, but conservative investors are best off sticking with companies that score over 60 for Dividend Safety.

Investors can learn more about Dividend Safety Scores and view their real-time track record here(since inception they have flagged 99% of dividend cuts in advance).

I used Dividend Safety Scores to identify seven companies that have either recently cut their dividend and remain in trouble, or that could be facing a dividend cut in the near future. Owning companies like these can hurt a conservative retirement portfolio.

Dividend Stocks to Avoid: Frontier (FTR)

Dividend Stocks to Avoid: Frontier (FTR)

Source: Shutterstock

Dividend Yield: 0% (Dividend is currently suspended)

Dividend Safety Score: 1 (Very Unsafe)

Frontier Communications Corp (NASDAQ:FTR) finally bit the bullet and completely suspended its dividend in February 2018. The company had a Dividend Safety Score of 1, signaling a very unsafe payout, from Simply Safe Dividends before its cut announcement was made.

Frontier has reported a net loss the last two fiscal years and is saddled with debt, in part due to its poor decision to acquire some of Verizon’s fiber assets in 2016 for $10 billion.

The firm’s weak financial position has made it very challenging for it to make the investments in its communications networks that are necessary to remain competitive.

When combined with Frontier’s large debt load, sizable dividend and ongoing customer losses, management’s decision to eliminate the payout isn’t a big surprise.

Investors seeking high-yield replacement ideas can review analysis on our favorite high-dividend stocks here.

Dividend Stocks to Avoid: CenturyLink (CTL)

Dividend Stocks to Avoid: CenturyLink (CTL)

Source: Shutterstock

Dividend Yield: 12.7%

Dividend Safety Score: 3 (Very Unsafe)

CenturyLink Inc (NYSE:CTL) is one of the largest telecom services providers in America and sports a juicy yield north of 10%.

The company closed its $34 billion acquisition of international service provider Level 3 Communications in late 2017 to become more focused on serving businesses rather than consumers. The combined company has more than 10 million landline phone connections, over 5 million broadband internet subscribers, a few hundred thousand satellite TV subscribers, and a large focus on enterprise IT services.

CenturyLink is no stranger to dividend cuts, having reduced its payout in early 2013 (CTL’s stock tumbled more than 20% on the news). And another dividend cut could be in the cards, with Simply Safe Dividends assigning the company a very weak Dividend Safety Score of 3.

Legacy wireline phone services have been in decline for years as wireless phones continue replacing them. As a result, the company’s primary cash cow has been shrinking at a double-digit pace, causing its payout ratio to spike above 100% last year.

Investors are hoping the company’s Level 3 acquisition will successfully diversify CenturyLink’s cash flow away from declining legacy landlines and result in a more sustainable dividend profile.

Unfortunately, CenturyLink had to take on substantial debt to do this deal, and its sales and margins continued contracting last quarter.

Investors can learn more about CenturyLink’s Level 3 acquisition and how it impacts dividend safety here.

Overall, CenturyLink’s management team appears to have a very slim margin for error, and the dividend is on shaky ground. Conservative income investors are likely better off going elsewhere for reliable dividends and capital preservation.

Dividend Stocks to Avoid: Government Properties Income Trust (GOV)

Dividend Stocks to Avoid: Government Properties Income Trust (GOV)

Source: Shutterstock

Dividend Yield: 12.5%

Dividend Safety Score: 3 (Very Unsafe)

While Government Properties Income Trust (NASDAQ:GOV) has not raised its dividend over the last five years, income investors can’t complain about the stock’s generous 8% average dividend yield during this time.

GOV current yields more than 12%, but unlike recent years, the stock is increasingly looking like a yield trap. In fact, Simply Safe Dividends assigns the company an extremely low Dividend Safety Score of 3.

GOV is a real estate investment trust which owns over 100 properties leased primarily to the U.S. government and state governments.

Unfortunately, governments are looking to become much more efficient with their spending, including reducing the amount of office space per employee.

Analysts expect GOV’s adjusted funds from operations (AFFO) per share to slip more than 15% over the next 12 months, which will push the company’s AFFO payout ratio to nearly 130%.

When combined with the firm’s substantial amount of debt, a meaningful dividend cut could be on the horizon.

Dividend Stocks to Avoid: GlaxoSmithKline (GSK)

Dividend Stocks to Avoid: GlaxoSmithKline (GSK)

Source: Shutterstock

Dividend Yield: 6.8%

Dividend Safety Score: 30 (Unsafe)

GlaxoSmithKline Plc (ADR) (NYSE:GSK) has kept its dividend frozen since 2012 and has impressively paid uninterrupted dividends for nearly 20 consecutive years. When combined with its high yield and seemingly conservative payout ratio below 40%, it’s no wonder why the stock is popular with income investors.

However, the pharmaceutical giant is facing real growth struggles as branded and generic competition eats away at the pricing of its core drugs.

With pressure to continue expanding and its dividend consuming a meaningful amount of cash flow, it’s not out of the question that GlaxoSmithKline might opt to reduce its dividend to free up growth capital and keep its balance sheet in good shape.

GlaxoSmithKline has a Dividend Safety Score of 30 from Simply Safe Dividends, indicating that its payout is potentially unsafe and has a heightened risk of being cut in the future.

Income investors can learn more about GlaxoSmithKline and the safety of its dividend in the research note here.

Dividend Stocks to Avoid: Waddell & Reed (WDR)

Dividend Stocks to Avoid: Waddell & Reed (WDR)

Source: Shutterstock

Dividend Yield: 5.1%

Dividend Safety Score: 12 (Very Unsafe)

It’s no secret that the actively managed investment fund industry is under pressure. High fees, generally poor performance and an ever-growing number of low-cost passively managed funds are all factors putting pressure on companies like Waddell & Reed.

The company’s earnings have steadily declined since 2014, pushing its dividend payout ratio up to close to 90% last year. As a result, management ultimately decided to slash the firm’s quarterly dividend by 46%.

Simply Safe Dividends had assigned the company a Dividend Safety Score of 12 prior to its reduction announcement, signaling high risk of a payout cut.

Unfortunately the outlook remains somewhat grim for the business, largely driven by continued performance struggles and relatively high fees that averaged 66.5 basis points last quarter.

Less than 30% of Waddell & Reed’s fund assets were ranked in the top half of their group by Morningstar over the past three-year performance period. Not surprisingly, Waddell & Reed continues to see a couple billion dollars of asset outflows each quarter.

Should the market take a tumble, the business would come under further strain. Investors looking for a higher quality business in this industry can review our research on T. Rowe Price (TROW) here.

Dividend Stocks to Avoid: Dine Brands Global (DIN)

Dividend Stocks to Avoid: Dine Brands Global (DIN)

Source: Shutterstock

Dividend Yield: 3.6%

Dividend Safety Score: 4 (Very Unsafe)

Dine Brands Global Inc (NYSE:DIN) owns or franchises more than 1,900 Applebee’s and nearly 1,800 International House of Pancakes (IHOP) restaurants throughout the country.

The full-service casual dining industry has come under pressure in recent years. More consumers are opting for quick-service restaurants, which typically offer lower prices, better food quality and shorter waits to support an on-the-go lifestyle.

Dine Brands Global saw its adjusted earnings per share decline by more than 30% in fiscal 2017, driven largely by a 5.3% decline in Applebee’s comparable same-restaurant sales.

This pressure ultimately caused the company to lower its dividend by 35% in February 2018 to free up cash for brand investments and support its stretched balance sheet.

Simply Safe Dividends had issued the company a Dividend Safety Score of 4 prior to the dividend cut announcement, signaling that the firm’s payout was potentially very unsafe.

While the new dividend amount appears to be more sustainable for now, the business remains under press. The stock’s new yield sits close to 3.6%, which isn’t very competitive with other income options given the payout’s weak growth potential going forward.

Dividend Stocks to Avoid: Macquarie (MIC)

Dividend Stocks to Avoid: Macquarie (MIC)

Dividend Yield: 15.1%

Dividend Safety Score: 20 (Very Unsafe)

The market usually does not like surprise dividend cuts, and Macquarie Infrastructure Corp’s(NYSE:MIC) decision to reduce its payout by 31% in February 2018 was no exception.

MIC’s stock tumbled as much as 40% on the news and remains in the dumps. Not only do dividend cuts reduce retirement income, but they can permanently lose an investor’s hard-earned capital.

The infrastructure company’s management has historically run the business with a relatively high debt load and elevated payout ratio, reflecting the fairly predictable results its assets generated but retaining little cash with which to plow back into growth projects.

A new CEO started in late 2017 and decided to monetize several major assets at the company for a hefty profit. As a result, cash flow will fall and the dividend needed to be adjusted down with it for the rest of 2018.

A lower dividend also allows the company to fund more of its growth projects with internally generated cash flow rather than depend more on capital markets to raise funds.

Simply Safe Dividends had slapped the company with a “Very Unsafe” score of 20 prior to its surprising announcement.

Conservative investors can consider cutting their losses and moving on to other investment opportunities with safer, faster-growing income.

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