I told you GameStops (GME) dividend was toast. Did you sell, or better yet, short the stock?
Just one quarter ago, we chatted about the inevitability of this paper payout ending in tears:
Brick and mortar video game retailer GameStop (GME) is a throwback to yesteryear. Its survived the rise of digital distribution for video games thus far because Microsoft, Sony and Nintendo havent fully digitalized their sales. (In other words, they still sell physical boxes that are bought at stores like GameStop.)
But this sales model is ultimately toast and GameStop doesnt have a convincing second act. Income investors who mistakenly think they are connecting with millennials with this double-digit dividend should give their kids (or better yet, their grandkids) a call to see how theyre buying their video games these days.
Since then, this happened:
GameStop? More Like DividendStop (Ha!)
When dividends get cut, stocks get crushed. And payouts go unfunded when business models become obsolete, as I warned with GameStop.
In that spirit, let’s discuss five popular Zombie dividends. These stocks are probably dead money at best because their business engines are slowing to a standstill.
PPL Corp. (PPL)
Dividend Yield: 5.5%
Utility stocks are well-known for their above-average yields and business stability. It doesnt get any better than what are effectively local monopolies for electricity generation. Especially when you consider that most utilities are also able to get small but regular rate hikes approved, bumping up their revenues and profits like clockwork.
But theyre not all gems.
PPL Corp. (PPL) is an uncommon utility in that its operations are domestic and international. That is, its 10 million-plus customers are split among Pennsylvania, Kentucky and Great Britain.
While 2018 was decent from a growth perspective, the companys results have been up and down for years. Its $7.8 billion in revenues last year were actually slightly down from 2014, as were its $2.58 in EPS. And a capital expenditure plan has been piling on the debt, which has climbed from $17.8 billion to $20.1 billion in just two years.
PPLs tighter financial situation has caused dividend growth to plumb laughable levels. This year, the utility company raised its payout by a mere two-tenths of a cent to 41.2 centsa 0.5% hike.
You could argue that PPL offers a nice yield as it is, but thats not even keeping total-return performance even close. Whereas other utilities are at least close to (and better, here and there) than the broader market, PPL comes up lame.
PPL Is a Low-Wattage Ute
Franklin Resources (BEN)
Dividend Yield: 3.2%
A year-and-a-half ago, I delved into some lesser-known Dividend Aristocrats looking for hidden winners.
Along the way, I dredged up a couple losers, too.
Franklin Resources (BEN) isnt a well-known consumer brand, but if youre reading this, youre probably familiar with its Franklin Templeton investment firm, which includes a distinguished line of bond funds and emerging-market products. And if youre an income investor, youre likely very aware of BENs status as a Dividend Aristocratthe company boasts 37 years of consecutive dividend increases, and counting.
However, I said at the time that competition and asset performance were weighing on ol Ben, and that hasnt changed. Assets under management, which were $753 billion as of September 2017, were at $721 billion as of April 2019 thats actually a recovery from below $650 million at the end of 2018!
Franklin Templeton also launched its first suite of passive ETFs in 2017, but the company has struggled to make much of a dent in that industry, too. Franklins $2.5 billion in AUM makes it the 31st-largest ETF provider behind such juggernauts as, ahem, Victory Capital Management and ARK.
Not exactly household names.
Franklin Resources top and bottom lines have been in steady decline for years, and theres not much signaling a renaissance soon. As a result, BEN has not only underperformed a modest S&P 500 total return since I last panned itit has delivered negative returns, even once dividends were accounted for.
A Poor Performance From Poor Richards Namesake
Annaly Capital Management (NLY)
Dividend Yield: 13.3%*
Next up, an update on a well-known high yielder in real estate: mortgage REIT Annaly Capital Management (NLY). Annaly invests most of its assets in agency mortgage-backed securities (MBSes), though it does some business in residential credit, commercial real estate and middle market lending.
In April, I pointed out that while its heavy concentration in fixed-rate securities wasnt as much of an issue as it was in the aughts, Annaly investors still had reason for concern. A string of lousy reports had continued into the fourth quarter, including a 13.3% year-over-year decline in the Annalys all-important core earnings per share.
More importantly: But dividend coverage remains an issue, too. Namely, Annaly has paid out all if not more of its profits out as dividends in each of the past three quarters. The yield is nice, but the cash flows behind it arent.
Fast-forward a couple months, and Annaly yet again posted core earnings that were shy of dividends.
But NLY did come up with an elegant solution to its dividend problem: It announced it would cut the payout to 25 cents per share starting in Q2, knocking its yield down from 13.3% to 10.9%.
Annaly is no stranger to dividend cutsthey were a regular occurrence from 2010 through 2014and theres no reason to trust that this will be the last one. Ignore this supposedly safer double-digit yield.
Coca-Cola (KO)
Dividend Yield: 3.2%
I beat up on Coca-Cola (KO) a lot, so lets look at a few positives first.
Now, lets lift the veil.
Coca-Cola is no doubt a survivor, both offering a quality namesake beverage that has pleased consumers for decades while also navigating some changes in consumer tastes by adding the likes of Minute Maid juices, Dasani water, Honest Tea, Powerade, Odwalla smoothies and, most recently, Britains Costa Coffee.
It seems like whenever Coca-Cola plugs one hole, two more emerge. The companys moves over the past couple years actually has Wall Street optimistic about revenue-growth prospects this year and next. But HSBCs Carlos Laboy pointed out new issues in his March downgrade of KO, saying that Coca-Colas strategy to push ahead with low-margin brands could frustrate bottlers, which in turn could hinder Coca-Colas international initiatives.
Meanwhile, KO offers a merely so-so yield, low profit expansion and weak dividend growth for a premium price of 22 times estimates. Yes, the company looks better than it has at other times in the past, but it still doesnt look good.
CVS Health (CVS)
Dividend Yield: 3.8%
CVS Health (CVS) would look, on its face, to be a cant-miss proposition.
Its positioned in the seemingly invincible business of selling prescription drugs to people, and it has grown to offer essentially convenience-store fare while also expanding to health-care services via its Minute Clinics. That business, by the way, helped fund more than a decade of consecutive annual dividend increases.
But over the past couple years, things have gotten complicated.
Chief rival Walgreens (WBA) grew via a failed buyout of Rite Aid (RAD) that did at least result in Walgreens being able to buy up about 2,000 new locations. That, and the threat of online pharmaciesspecifically, nosing around from Amazon (AMZN)prompted CVS to try to differentiate itself through a $69 billion merger with health insurer Aetna.
Heres a look at what CVS has done since around the time CVS-Aetna talk started swirling:
CVS Healths Heartbeat Is Slowing
Since then, Amazon has bought online pharmacy PillPack, making its intentions crystal clear. CVS, meanwhile, banked so hard on the Aetna merger that it had to put dividend growth on ice the payout has been frozen at 50 cents per the start of 2017.
And analyst skepticism of CVS ability to fold in Aetna is so far being proven out.
CVS Health just finished unveiling its long-term goals in response to wary investors and analysts that have been more than vocal about their doubt. CVS did little to encourage Wall Street, however, saying that 2019 earnings would actually decline, and projecting smaller profit growth over the next two years than the pros covering CVS projected.
Thats worrying on its own. Plus this plan likely doesnt account for the potential disruption once Amazon really starts leveraging its PillPack purchase. Will CVS return to growth? Certainly. But I expect it to do so like any unwieldy zombie would: slowly and messily.
How to Retire on an 8% Yield Paid Each and Every Month
Its clear you need to clear a certain financial bar if you want to reach the retirement promised land.
Merrill Lynchs brain trust says you need $738,400 to retire. Go on most financial sites and theyll tell you the magic number is $1 million. Suze Orman said to a word, You need at least $5 million, or $6 million. Really, you might need $10 millionand rightfully took a lot of flack for that.
Theyre actually all correct… if youre heavily invested in low-yielding bonds or the kinds of safe, decently yielding blue-chip stocks Ive mentioned above.
But if you stockpile the picks in my 8% Monthly Payer Portfolio,including my two favorite preferred stock plays, which each deliver uber-safe yields of more than 7%you can bank on a comfortable retirement with a mere $500,000 nest egg.
And you can collect a fat income check each and every month, to boot!
This substantial-dividend strategy can net you nearly $3,300 in payouts every month, from an average 7.7% annual yield. And I practice what I preach: These stocks are expected to dish out 10%-plus average price upside, expanding your nest egg to grow your income potential even more.
You dont need to learn some strange options tactics or complex trading routine. You can live off a $500,000 portfolio indefinitely by following just two simple steps:
Thats it!
This portfolio includes some truly amazing dividend stocks, including
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