5 Dividend Stocks Best Avoided

I’m a big believer in dividend stocks. In fact, it’s rare that I buy a stock that doesn’t pay a dividend. Nothing does a better job of keeping management honest than the responsibility of paying shareholders a regular dividend.

But that said, not all dividend stocks are created equal. The “perfect” dividend stocks are ones that pay a competitive current yield but also have a good track record of raising the dividend every year. A high-yielding stock that doesn’t raise its dividend on a regular basis is essentially a risky bond with a payout that can be cut at management’s whim. Sure, you can fudge your numbers to make your earning per share number every quarter. But cold, hard cash doesn’t lie. You either have it to pay out … or you don’t.

You also need to see growing revenues and earnings. Without more money coming in, it’s hard for a company to send more in dividends outto shareholders.

And finally, we should always be a little wary of dividend stocks with extremely high yields. Once in a while, you can find a real gem with a fat yield due to a temporary mispricing. But more often than not, when you see an exceptionally high yield, the market is essentially telling you that the dividend is likely to get cut.

So with that said, let’s take a look at five dividend stocks you’re better off avoiding. All might be alluring temptresses, but they will potentially lead you on the path of income destruction.

Vale SA 

Dividend Yield: 9.2%

I’ll start with Brazilian miner Vale SA (VALE). Vale today is one of the highest-yielding stocks you can find with a dividend yield of 9.2%. It’s also a stock whose dividend is almost certain to be cut. Although the board of directors still has to approve it, management proposed slashing the dividend by half in late September.

I have nothing against Vale … or against mining stocks in general. Under the right conditions, miners can be wildly profitable trades. But they are terrible dividend stocks.

Think about it. If you’re buying dividend stocks, chances are good that you’re doing so because you need current income. You certainly wouldn’t complain if you had capital gains. But capital gains are a secondary priority.

And if it’s income you need, stability is of the utmost importance. Your expenses rarely fall, so it’s critical that your income not fall either.