These 3 Stocks Are Nothing but Dividend Yield Traps

T Chart
T Chart

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Ma Bell keeps a tight grip on those dividend purse strings. AT&T's payout per share has increased regularly, but not by much. Over the last five years, the grand total of increases added up to just 12% -- an annual average of 2.2%. Meanwhile, the S&P's payouts rose by 58%, or 9.6% annually.

It's not like AT&T has the luxury of simply boosting its payout policy by a large amount. Across the last four quarters, AT&T has paid out 79% of its free cash flows in the form of dividends. Three months ago, that cash payout ratio stood at 99%. Truly healthy dividend payers often funnel less than 50% of their free cash into dividend checks, leaving lots of headroom to handle future dividend increases, cash-intensive business projects, and the occasional emergency.

Long story short, AT&T's generous dividend yield is a mirage that covers up disappointing stock returns and constrained dividend increases. Two wrongs don't make a right.

Tim Beyers (Garmin): For some, Garmin surely looks like a stock worth salivating over. What's not to like about a dividend that yields 5.75%, especially in today's low-interest environment, where a 10-year Treasury bond yields just 2.16% as of this writing?

Plenty, it turns out.

First, there's good reason to doubt whether Garmin can keep paying its dividend at the same rate it does today. Cash from operations fell 40.5% last year and is down 58.9% to just $271.7 million over the trailing 12 months, S&P Capital IQ reports. That's nowhere near enough to cover the $368.4 million paid in common dividends over the same period.

Second, a strong dividend isn't necessarily an indicator of a strong stock, and Garmin shares are down over 30% year to date. Worse, the stock has underperformed every major index over the past 12 months, the past five years, and the past decade. There's no reason believe Garmin can reverse that equation when most modern smartphones duplicate the basic functions of a stand-alone GPS device.

Garmin may still make a good product, but as a stock, it's just as likely to steer you wrong.

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The article These 3 Stocks Are Nothing but Dividend Yield Traps originally appeared on

Anders Bylund owns shares of Netflix. Rich Smith has no position in any stocks mentioned. Tim Beyers owns shares of Netflix.The Motley Fool owns shares of and recommends Netflix. Try any of our Foolish newsletter services free for 30 days .We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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