After a raucous autumn and a tumultuous election season, many investors are looking to get off the roller-coaster of timing stock prices and looking to play it a little safer by investing in dividend stocks instead. While this is typically a solid way to boost your passive income and get a nice quarterly payout in your portfolio, 2017 could bring some unwanted bumps in the road for dividend stocks.
For starters, several indicators point to a rise in interest rates in the coming year. The Federal Reserve is expected to incrementally raise interest rates, which historically makes bonds more appealing than stocks for investors, and dividend stocks can take a nosedive during periods of bond growth. Also, many economists are forecasting a rise in inflation, another reason to choose dividend stocks very carefully. Weak ones should be avoided.
Two dividend stocks in particular provide good examples of dividend stocks that look great on the surface but are too risky underneath the shine to hang on to in 2017: Abercrombie & Fitch (ANF, Financial) and Windstream Holdings (WIN, Financial).
Abercromie & Fitch
Though it was a retail giant in the 1990s, so much has gone wrong with Abercrombie & Fitch in recent years that profits have been dismal for the past 15 quarters. Nearly four years is a long time to try to convince investors things are looking up, and it seems unlikely that the company can sustain its high dividend payouts for much longer.
Whether you blame the recent crash and burn of this company on the public relations nightmares caused by former CEO Mike JeffriesÂ orÂ the rise of fast fashion retailers like H&M (OSTO:HM B) pushing slower-moving dinosaurs out of contention – or just think shoppers are interested in better deals and stores that don’t come with an overpowering whiff of aftershave –Â Abercrombie & Fitch is unlikely to turn things around anytime soon, which makes the siren song of its dividend payouts too good to be believed when taken on balance with the rest of its baggage.
Though Abercrombie & Fitch’s tale of woe is fairly well known, Windstream Holdings is under the radar and out of the news, thanks to its service corridor in largely rural areas of the Midwest and South. Windstream is an ISP with a growth strategy based squarely on buying up smaller competitors and neighbors to expand its coverage area. Scaling service is notoriously difficult for businesses, and the expansion has had its growing pains.
Despite a relatively healthy dividend payout, Windstream hasn’t raised it in the past six years; meanwhile, the company’s revenue continues to decline. This is another example of the importance of digging past the payouts to research a business' sustainability; in the case of Windstream, it’s safer for investors to walk away.
The bottom line
Don’t be put off by the story of these two risky dividend stocks. A robust portfolio should make room for strong dividend stocks to boost revenue and further diversify, especially in uncertain times. As with all investing, the key is to research your options before buying in to make sure the future outlook is as positive as the dividend payout would suggest on the surface.
If the idea of researching individual stocks strikes you as too time consuming, consider investing in an index fund that focuses on high-yield dividend stocks instead. This will give you a broad base that’s already well-diversified without paying high fees for an actively managed fund.
There’s a product out there for every investor so there are many ways to take advantage of truly worthwhile dividend stocks in the coming year.
Disclosure: I do not have shares in Ambercrombie & Fitch or Windstream Holdings.
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