With interest rates essentially cut to 0%, income investors have limited options in the market these days. The bond market isn't pricing in a Federal Reserve rate hike for at least the next two years, according to DataTrek Research. One potential place for income investors to turn is dividend stocks. However, a dividend is only as good as the company paying it. If a company cuts its dividend or if a dividend stock underperforms the market, dividend investors can potentially take a big hit. Here are eight dividend stocks that investors should think twice about buying, according to CFRA.
Verizon Communications (ticker: VZ)
At first glance, telecom giant Verizon's 4.2% dividend yield may look attractive. However, analyst Keith Snyder says Verizon's media group will continue to weigh on its overall numbers given the company hasn't invested aggressively in new content. For the foreseeable future, Snyder says Verizon will spend its cash primarily on upgrading networks, paying dividends and reducing debt. In addition, Snyder says 5G mobile service may be more costly than Verizon initially expected, and the company will struggle to fend off rising competition from T-Mobile (TMUS). CFRA has a "sell" rating and $50 price target for VZ stock.
Public Storage (PSA)
Public Storage is a real estate investment trust that owns and operates self-storage facilities. Analyst Chris Kuiper says the storage industry was already showing signs of slowing growth prior to the recent economic shutdown. Kuiper says Public Storage is likely dealing with an oversupplied market given a sharp recent increase in marketing expenses. Last quarter, marketing costs were up 40% from a year ago, and Kuiper says rates could be pressured in 2020 in key metropolitan markets. While the REIT pays a 4.3% dividend yield, CFRA has a "sell" rating and $200 price target for PSA stock.
Valero Energy Corp. (VLO)
Valero Energy is one of the largest independent petroleum refiners, operating 13 refineries in the U.S., Canada and Europe. The oil market has been in turmoil in 2020 due to a pricing war between Saudi Arabia and Russia, U.S. crude oil storage capacity approaching 100% and oil demand crashing due to travel restrictions. Analyst Stewart Glickman recently downgraded Valero. He says demand will remain challenged in the near term, and the U.S. export market is showing signs of significant weakness. VLO stock has a 6.2% dividend, but CFRA has a "sell" rating and $46 price target.
Simon Property Group (SPG)
Simon Property Group is a REIT that owns and operates regional malls and premium outlets. Kuiper downgraded Simon in February, even prior to the economic shutdown. He says department stores were already on shaky ground prior to the health crisis and were likely on track for widespread store closures in 2020. While Kuiper says Simon is still the "best-of-breed" among shopping mall REITs, he is skeptical of the company doubling down on malls by acquiring Taubman Centers (TCO) and bankrupt apparel retailer Forever 21. CFRA has a "sell" rating and $120 price target for the stock.
Marathon Petroleum Corp. (MPC)
Like Valero, Marathon Petroleum is one of the largest U.S. independent oil refiners. Glickman says the health crisis has significantly disrupted Marathon's strategic plans. For example, Marathon terminated its $22 billion sale of its Speedway retail business. Not only does Marathon have troubling debt levels, but it also has major debt payments due within the next 18 months. To make matters worse, Marathon's $2.31 per share annual dividend payment dwarfs its projected earnings per share, and Glickman says the 7.2% dividend yield is at high risk. CFRA has a "sell" rating and $20 price target for MPC stock.
Synchrony Financial (SYF)
Synchrony Financial is a leading financial services company and is the largest private label credit card provider in the U.S. The stock pays a 4.4% dividend, but Kuiper says investors don't seem to be fully appreciating the company's credit and revenue risk. In addition, a steep drop in spending and loan growth will squeeze Synchrony's margins as users cut back on nonessential spending. Kuiper says Synchrony's customers are likely even more leveraged than those of other lenders, making the company particularly susceptible to unsecured loan defaults. CFRA has a "sell" rating and $11 price target for SYF stock.
Extra Space Storage (EXR)
Extra Space Storage is a storage REIT that owns more than 1,800 facilities in 40 different states. Kuiper says, like Public Storage, Extra Space is vulnerable to self-storage oversupply. In fact, he says about 37% of Extra Space's net operating income comes from particularly risky metropolitan areas, a much higher percentage than most of its peers. Kuiper is anticipating Extra Space will likely find itself in an intense battle for market share that will drive rates lower and marketing costs higher. EXR has a 4% dividend, but CFRA has a "sell" rating and $95 target.
CenturyLink is the third-largest landline telephone company in the U.S. Even though its dividend was covered by its cash flow, CenturyLink chose to cut its dividend by more than 50% in early 2019. The stock is down another 29.4% since the beginning of 2019, once again driving its dividend yield to 9.4%. Snyder says debt is a heavy burden for CenturyLink. Given the long-term nature of the company's potential turnaround plan, Snyder says the stock will likely continue to underperform. CFRA has a "sell" rating and $10 price target for CTL stock.
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