Dividend stocks have maintained their appeal among the investing community for years. And why not? Stocks that offer consistent dividend yields are generally fundamentally robust and leading players in their respective industries, with a proven track record of operational strength. Additionally, dividends can provide a source of regular income for investors, providing value above and beyond any capital appreciation.
However, dividend stocks aren't any more of a “sure thing” than any other asset class. In fact, amid the growth-fueled stock rally earlier this year, dividend stocks had their worst first-half performance since 2009. Even the most elite and established dividend paying stocks - the Dividend Aristocrats - have fallen on hard times, with the S&P 500 Dividend Aristocrats ETF (NOBL) still in negative territory YTD, while the S&P 500 SPDR has (SPY) gained nearly 15%.
Unfortunately, the downtrend in dividend stocks has muddied the water for income investors. Lower share prices push yields higher - and while some dividend stocks are legitimately a bargain right now, other income picks that are genuinely weak under the surface may still lure unsuspecting buyers with their lofty yields.
Here, we'll highlight three stocks that pay a high dividend yield - but given the broader fundamental challenges facing each name, investors in search of steady income stocks would be wise to look elsewhere.
Hawaiian Electric Industries
Founded in 1891, Hawaiian Electric Industries (HE) is a utility company that provides electricity and other energy-related services to customers in Hawaii. Apart from serving power to almost 95% of the population in Hawaii, the company also provides energy efficiency programs and renewable energy development services. Its market cap currently stands at $1.47 billion.
Though it offers an attractive dividend yield of 10.6%, Hawaiian Electric stock is down by a steep 65.4% on a YTD basis. Although the recent weakness in the utilities group may have dragged the stock down, there have been other contributing factors to HE's underperformance.
First, potentially high litigation costs arising from the Maui wildfires are expected to act as a long-term financial drain on the company, and prompted all three major U.S. agencies to downgrade Hawaiian Electric's credit rating to junk status.
When HE reports earnings on Nov. 9, Wall Street is looking for EPS to decline 1.75% to $0.56 per share. The company has fallen short of consensus estimates in each of its past two quarterly reports.
Analyst opinions on the stock are limited, with just three in coverage - but there's an overall rating of “Hold” with a mean target price of $11.50. This represents a downside potential of roughly 17% from current levels. Out of the three analysts covering the stock, two have a “Hold” rating and one has a “Moderate Sell” rating.
Footlocker
Based out of New York City, Footlocker (FL) is a leading athletic footwear and apparel retailer. The company sells a wide range of sports products from leading brands such as Nike, Adidas, and Jordan. Founded in 1974, Footlocker operates over 2,800 stores in 27 countries. Its market cap currently stands at about $2.08 billion.
Footlocker stock has a dividend yield of 7.24%, and has tumbled almost 36% in 2023 so far.
Footlocker had an abysmal showing in its latest results for the second quarter. Revenues of $1.86 billion were down 9.9% and EPS plummeted by 96.4% from the year-ago period to $0.04, just short of the consensus estimate. However, the biggest blow to the stock has been the company's decision to “pause” its quarterly cash dividends beyond its October payout. Management cited “longer-term strategic priorities” as the rationale for this move.
Also, Footlocker's updated guidance contributed to the weakness in its stock. The company now expects an even further slowdown in sales in 2023.
Moreover, falling gross margins and rising inventory costs are negatives for the company. Footlocker's online strategy is also lagging consumer trends; the retailer derives a mere 17% of sales from online avenues, whereas this report cites that about 74% of footwear sales are done online. Its dependence on Nike (NKE) also exposes it to single-vendor risk (about 48%-56% of Footlocker's revenue is from selling Nike footwear).
Taking this into context, analysts have a consensus “Hold” rating on the stock (down from “Moderate Buy” two months ago) and a mean target price of $19.94. This indicates a downside potential of 13% from current levels. Out of 18 analysts covering the stock, four have a “Strong Buy” rating, 11 have a “Hold” rating, and three have a “Strong Sell” rating.
Nu Skin Enterprises
We round out our list with direct selling company Nu Skin Enterprises (NUS). Nu Skin develops, manufactures, and distributes innovative consumer products, primarily in personal care and nutritional categories. Nu Skin operates in over 50 countries and markets its products through a network of more than 1 million independent distributors. Founded in 1984, its market cap currently stands at $842.3 million.
Nu Skin stock is down 55.7% on a YTD basis and it offers a dividend yield of 9.2%.
For its latest results for Q3 2023, Nu Skin reported a loss of $0.74 per share, wider than the previous year's figure of $0.51. On an adjusted basis, EPS of $0.56 missed analysts' expectations of $0.64. The company's bottom line has missed expectations in three out of the past five quarters. Revenues fell 7% from the prior year to $498.8 million, driven by a drop in total customers (down 21% YoY), total paid affiliates (down 23% YoY), and total sales leaders (down 6% YoY).
Nu Skin's lack of retail store presence (it operates physical stores only in China) and its multi-level marketing strategy to drive sales (which results in high S,G&A costs) make its business model appear weak for sustained sales growth in the years to come. Moreover, the company remains vulnerable to considerable litigation risks. This is because about 45% of its revenue is related to wellness products - including nutritional supplements that lack any oversight or evaluation by the Food and Drug Administration (FDA).
Overall, analysts have a “Hold” rating on the stock with a mean target price of $27.75, which represents a sizeable upside potential of 54% from current levels. That said, it must be noted that analyst coverage remains limited on the stock, with only four firms tracking the shares.
