2 High-Yielding Stocks That Might Be Dividend Traps

There’s more to income investing than high yields. A lot of companies offering chunky distributions may not be able to keep the hefty payouts coming. Even if the dividend is sustainable in the near term, you’re losing if you buy a stock yielding 10% that’s trading 20% lower a year later.

What are some of the names that you might want to avoid? I think Altria (NYSE: MO) and Leggett & Platt (NYSE: LEG) could be dividend traps. They have high yields that might make you look twice, but I have my own takes on those double takes. Let’s take a closer look.

1. Altria

Altria might not seem to check off the obvious boxes you see in a dividend trap. It’s a Dividend King, hiking its payout for 54 consecutive years. It even boosted its 2024 guidance last week, so unlike Sammy Hagar, Altria is prepared to drive 55 (years of increased distributions).

However, where there’s smoke, there’s fire. Kings fall, and in Altria’s case, even the boost in its full-year profit outlook isn’t exactly what it seems. Last week it announced that it would be selling a significant chunk of its stake in Anheuser-Busch InBev (NYSE: BUD). It will use the $2.4 billion in proceeds to accelerate its share repurchase efforts.

The rosier guidance is essentially the handiwork of taking the same profit outlook and dividing it by fewer shares to arrive at a higher forecast of per-share profitability. It’s great that Altria will have to cut fewer checks with the reduction in shares, but it doesn’t mean that the business is any better. Like someone holding a garage sale to raise money, eventually Altria will run out of assets to sell.

Image source: Getty Images.

Altria knows that cigarettes are as addictive as they are dangerous. It’s been using its generous cash flow to return money to its shareholders through buybacks and dividend boosts. It has also been investing in or acquiring companies in the vaping, cannabis, and wine markets. Some of those decisions have failed.

After eight consecutive years of increasing its operating profit, Altria took a small step back last year. Revenue also dipped for the second year in a row, but it’s not as if this were ever a top-line growth story. Despite a history of acquiring other sin stocks to prop up its sales and diversify its business, it hasn’t topped 6% revenue growth in any year since 2004.

Altria’s yield of 8.8% is attractive. The state of its business, future legal liabilities, and poor diversification history isn’t so attractive. In summary, I think Altria is all smoke and mere errs.

2. Leggett & Platt

Another king that could fall this year is Leggett & Platt. It’s not a household name despite an impressive 52-year run of boosting its dividend.

Leggett & Platt makes components used in bedding, furniture, and flooring solutions. As you can imagine, high mortgage rates have cooled the housing market. It also makes seat supports and lumbar systems for the automotive industry, and that’s another market that can’t seem to shift into drive.

Revenue has declined for six consecutive quarters, and the bottom line is taking a bigger hit. Leggett & Platt has fallen short of Wall Street profit targets in each of its last three reports, and analysts see revenue and earnings sliding again in 2024.

I should probably point out that I’m currently caught in this trap. I bought some shares of Leggett & Platt two months ago, figuring that its business would recover along with the real estate market this year. The 7.9% yield at the time would reward me as I wait.

It hasn’t worked out for me so far. I’m sitting on a 17% decline on the shares, pushing the yield up to 9.8%.

Leggett & Platt announced a restructuring of its bedding products segment in January. Last month it announced disappointing guidance. It now expects to generate adjusted earnings per share between $1.05 and $1.35 this year. That’s a lot less than the $1.84 a share it paid out over the past year in quarterly disbursements.

With stubborn inflation rates likely to push out the Federal Reserve easing on rates, the recovery here will take longer than I hoped two months ago. Along the way, this king’s days on the throne appear to be numbered.

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Rick Munarriz has positions in Leggett & Platt. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

2 High-Yielding Stocks That Might Be Dividend Traps was originally published by The Motley Fool