There are a lot of overvalued dividend stocks out there.
Time to wisely kick a few stocks out of your portfolio.
While the uninformed focus on equity markets potentially being a bubble, the most obvious bubble in the market is the risk of some higher-yielding dividend stocks.
The fixed income market is normally a place of stoic safety—the purview of those looking to avoid risk.
Is it really possible that allegedly safe Treasury securities could lose significant value?
You bet they can—and they will.
Correction: they are. As we’ve seen over the last two months, yields are falling further.
While it’s the market’s worst-kept secret, many investors will still lose big money watching their fixed-income investments evaporate. You don’t have to be one of them.
You do, however, need to see the writing on the wall and be willing to take action to protect your capital during what will likely be a long period of rising interest rates.
It’s not just bonds; other cash-flow-related securities like dividend stocks will suffer, as well.
Dividend stocks were the one safe haven during the crisis-level low-interest-rate phase now ending. The search for yield resulted in shares being bid up to unsustainable levels. Now with rates on their way up, dividend stocks are on their way down.
Get out while you can, with most dividend stocks trading at peak value.
Here are three dividend stocks to sell now:
McCormick & Company (NYSE: MKC)
The packaged food company is a great example of a bubble in dividend stocks. While there’s some justification for paying a high price for consistent cash flow, does it really make sense to pay 28 times 2021 estimated earnings?
Not really, especially when you consider that the company expects to grow profits in the single digits.
What happens to the valuation when yield seekers go elsewhere? Those that espouse dividend stocks fail to answer that question.
When an investment theme gets overdone, basic principles like valuation fall by the wayside; ultimately, the market proves that valuation does matter.
Sell McCormick before the market figures that out.
Kimberly Clark (NYSE: KMB)
From an investment perspective, there’s nothing sexy about Kimberly.
Typically, the market hands out premium valuations when there are fast-growing profits. That’s not the case with Kimberly Clark.
The company lowered 2021 sales growth to 0 to 1% with adjusted earnings down to $7.30 to $7.55.
Analysts expect the company to cut profit projections by 8% from the current year to the next. At current prices, shares trade for a very healthy 19 times 2021 estimated earnings.
The reason for the premium is the dividend. Kimberly Clark pays out more than 3% per annum. With interest rates so low, that’s an attractive return. If there is profit growth on top of that, you might have a meaningful combined return.
That argument fails when the valuation is so high. The stock continues to underperform, down 4% compared to the Consumer Staples Select Sector SPDR ETF (XLP) returned 22%.
This is the risk investors face, at current prices.
That 3% dividend might not look so attractive now. Add in the strong dollar risk it faces, and you have all the reason you need to break up with Kim.
AT&T (NYSE: T)
Investors have a love-hate relationship with AT&T.
When the company tried to break out of the “boring” telecom space and move into the hot media/content arena buying Direct TV and Time Warner, many investors cheered.
Except when management went to execute the plan, the business model got really muddled between cell phone carrier and media content.
And Wall Street didn’t like that. The stock price went nowhere.
Yes, the company has paid out a rich dividend of 7% annually. But that’s coming to an end.
With the focus on the 5G and telecom build-out, management wants to conserve cash. So the dividend will be cut.
How much? Management hasn’t said, but speculation on the Street is it could be cutting the dividend in half.
And since the announced spin-off of the media properties, the stock price still hasn’t gone anywhere.
Move on from AT&T. There are better dividend players that can hold their yields and appreciate in price at the same time.
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