10 Dangerous Dividends to Avoid

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Today's current low-interest-rate environment has made income-producing stocks all the rage. And while we certainly support looking at income producers in general, maintaining a "guilty until proven innocent" approach in assessing dividend stocks will save the average investor from a lot of future heartache. In that vein, I want to highlight 10 stocks from the industrial arena that investors should approach with extreme caution.

Caveat emptor
Investors love companies that seek to reward their shareholders, via either dividends or share buyback programs. However, for some companies, the pressure to maintain the upward trajectory of their payouts can sometimes override good business sense. The companies below all pay out more than three-quarters of their reported net income in the form of dividends. And while this can mean many things, investors everywhere need to look at such figures with a healthy dose of skepticism.

Company

Dividend Yield

Payout Ratio

Harsco (NYS: HSC) 3.6%362.6%
Baltic Trading Limited8%296%
Universal Forest Products (NAS: UFPI) 1.3%234.1%
Standard Register7%182.5%
R.R. Donnelley & Sons (NAS: RRD) 7%170.1%
Douglas Dynamics (NYS: PLOW) 5.6%155.8%
HNI (NYS: HNI) 4.5%128.2%
Briggs & Stratton (NYS: BGG) 2.7%91.7%
Pitney Bowes (NYS: PBI) 7.4%88.7%
Alexander & Baldwin (NYS: ALEX) 3%76%

Source: Capital IQ, a division of Standard & Poor's.

This chart should help drive home the point that not all dividends are created equal. While some corporate structures mandate that the company pay out a high percentage of its earnings as dividends each period (REITs, for example), these companies should face no such requirements. And while those with payout ratios under 100% should theoretically have enough money to cover their dividends, many of these firms paid out substantially more money than their businesses generated in earnings over the last 12 months. Hardly seems sustainable, right?

While these companies have any number of tricks up their respective sleeves to keep those checks hitting your mailbox, most of those actions can damage shareholders over the long-term. For instance, they can take on additional debt, issue more shares, invest less back into the business, or dig into their cash coffers. Unfortunately, each of these actions either increases the risk inherent in the business or damages current shareholders. As advocates of long-term investing, we want our investments to do the right thing (although we hate seeing it), even if it means enduring some pain in the interim.

Foolish takeaway
Investors seeking income should always look beyond a stock's yield. They need to see that the company can consistently meet its obligations, reinvest in and maintain the business, and then distribute cash. For income investors, buying a stock based on its high yield alone does little good if that yield only shrinks or disappears after you buy it. With companies facing massive short-term pressure to keep payouts high, it's up to you to know that your dividend stock will continue to line your pockets for years to come.

The market has plenty of great dividend stocks out there. Research proves that those little checks help investors beat the market and retire in style. The Motley Fool has compiled a report for you highlighting some of best dividend opportunities on the market. Click here to get your free copy today.

At the time this article was published Foolish contributor Andrew Tonner holds no financial position in any of the companies mentioned in this article. The Motley Fool owns shares of Universal Forest Products. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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