Investor excitement flows through the air: for the first time ever, the Dow Jones Industrial Average (INDEXDJX:.DJI) broke 15,000. In only five months in 2013, the Dow has risen more than 16%, better than 2011 and 2012 combined. That said, now is a great time to evaluate your portfolio.
Winners and losers
During an expansion, there are winners and losers (the under-performers). The latest winners are cyclical stocks. These companies get hit in a market downturn, but they bounce back as consumers and businesses grow in confidence. Example sectors include consumer discretionary, luxury goods, and real estate. But remember, not all cyclical stocks are great buys (see below).
On the flip side are the non-cyclical, defensive companies which provide stability during times of volatility. Now investors are jumping out of dividend shares – the stocks that pulled them out of the recession in the first place. Their bread and butter since 2010. But this is no time to get sentimental – investing is a business, not a relationship. If you don’t want your portfolio left behind as the economy starts whirring, you need to drop these four dividend stocks (and one volatile cyclical stock) now:
Chesapeake bogged down
Let’s start with cyclical Chesapeake Energy Corporation (NYSE:CHK). We, at ADifferentAngle, covered reasons Chesapeake could do well in our post “2 Stocks Ready to Profit from the Coming Oil Boom” but here is an opposing view. Oil continues to do well, but natural gas is still anyone’s guess. Chesapeake has 78% downsidehedgeprotection on natural gas until Q4 2013, and it also has 88% of oil covered. That said, Chesapeake Energy Corporation (NYSE:CHK) likely would not participate in an oil rally, but is still exposed in the case that natural gas prices falter.
In terms of payouts, Chesapeake paid out a steady dividend for years, but it’s run into profitability issues. By “profitability issues,” I’m talking about negative EPS in two of the last four years. Not surprisingly, Chesapeake Energy Corporation (NYSE:CHK) started hunting for a new CEO in January and settled on Robert Lawler, a former executive at Anadarko Petroleum Corporation (NYSE:APC).
Mr. Lawler will have his hands full when he takes the reins on June 17. The company has been cutting costs and selling assets since last year, but remains saddled with $13.4 billion of debt. Low natural gas prices aren’t helping the second-largest U.S. natural gas producer, either. In response, Chesapeake Energy Corporation (NYSE:CHK) stepped up production of the more profitable crude oil by more than 50% in the first quarter.
These changes are the right steps for the company to regain profitability, but don’t expect share price growth from Chesapeake Energy Corporation (NYSE:CHK) until it can at least turn a profit.
America’s classic
The Coca-Cola Company (NYSE:KO) is another great American standby when economic times get tough. Here’s how Coca-Cola (orange) compared to the Dow (blue) in percentage returns from 2008 through 2010:
Not bad, right? The Coca-Cola Company (NYSE:KO) actually managed a positive return in the three years while the DJIA languished in double-digit losses. But the Dow Jones has since caught up with Coca-Cola and looks likely to outpace it this year. The Coca-Cola Company (NYSE:KO)’s stock price is showing signs of leveling off. But that’s not really a surprise: Coca-Cola gives out more than 50% of its profits to shareholders. It isn’t looking for high-growth opportunities. Leave The Coca-Cola Company (NYSE:KO) for a rainy day.
Verizon’s cash isn’t for growth
Verizon Communications Inc. (NYSE:VZ)‘s earnings per share are slouching, but its dividend grew every year since 2006. Here’s some more dubious news: Verizon’s dividend has been greater than earnings per share for the last four years. In other words, Verizon pays out more to shareholders than it makes in a year! Last year, EPS was only $0.31, but Verizon Communications Inc. (NYSE:VZ) paid out $2.03 in dividends – that’s a payout ratio of 655%! So much for sustainable business practices.
Verizon spent a large part of last year’s cash balance paying out $18 billion in dividends. According to Morningstar, nearly half of Verizon’s debt comes due this year (thank goodness refinancing rates are low). Much of the remaining cash balance will go toward paying off long-term debt. Clearly Verizon Communications Inc. (NYSE:VZ) isn’t in the growth segment, either.
Oil companies just don’t have the energy
Exxon Mobil Corporation (NYSE:XOM) and rival BP plc (ADR) (NYSE:BP) are two more stocks you can count on for a steady dividend. Here are the two companies’ payout ratios for the last five years:
| 2012 | 2011 | 2010 | 2009 | 2008 | |
|---|---|---|---|---|---|
| ExxonMobil | 22.5% | 22.0% | 28.0% | 41.7% | 17.8% |
| BP | 54.6% | 20.8% | – | 64.0% | 49.4% |
Data from morningstar.com
Exxon Mobil Corporation (NYSE:XOM) looks like the other dividend-payers here, but the company is actually pursuing an opportunity to export LNG out of Papua New Guinea. This is a better growth prospect than most other dividend companies have. However, investors’ responses are moderate at best. Exxon Mobil Corporation (NYSE:XOM)’s stock price registered only single-digit gains year-to-date. That’s barely moving compared to the Dow’s recent 16%+ gains.
BP plc (ADR) (NYSE:BP) is still dealing with lawsuits from the 2010 oil spill. Plus, analysts estimate that the company made only $15 profit per barrel, well below competitors’ profits of more than $20 per barrel. BP plc (ADR) (NYSE:BP) will be searching for projects with higher margins, and I think that the share price will stay flat until the company raises margins.
Conclusion
Dividend stocks are great when industry is in a bad spot, but they’re no place to go for stock price growth. If you hope to keep up with an increasing stock market, it might be time to let go of the dividend stocks that can hold you back.
This article was written by Nathan Adamo and edited by Chris Marasco. Chris Marasco is Head Editor of ADifferentAngle. Neither has a position in any stocks mentioned. The Motley Fool recommends The Coca-Cola Company (NYSE:KO). The Motley Fool has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy Corporation (NYSE:CHK).
The article 4 Dividend Stocks That Will Hold You Back originally appeared on Fool.com.
Marie is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
