Stock Market Crash Warning: Don’t Let These 7 Dividend Stocks Surprise You

A stock market crash can be great for dividend stocks, but not for this list of dividend stocks to avoid. If we estimate that the correction of broader indices like the S&P500 is only temporary, then the dividend yield paid by these companies increases, increasing the long-term income potential. It is then possible to improve their cost base and return on cost (YoC) as dividends increase in the future.

However, a stock market crash might not be beneficial for these dividend stocks. These companies have problematic balance sheets or inconsistent earnings. Some have concerns about their competitive moats or excessive debt levels. Regardless, a simple decline in their stock price does not fully offset these risks and effectively makes them traps for unwary investors.

So, in order to focus on the highest quality investments, I’ve put together a list of seven dividend stocks that investors should consider avoiding if we see a major correction in the markets. One should instead opt for Dividend Kings or Blue-chip Aristocrats in these conditions as this can help protect capital as well as increase its long-term income potential.

AT&T (T)

AT&T (NYSE:T) is facing declining revenues in traditional business segments, increasing competition and high debt levels. Additionally, recent dividend cuts have raised concerns. This is a classic example of how an iconic household brand can fall so far out of favor, and how no blue-chip investment is ever a set-it-and-forget-it investment.

However, in the third quarter of 2023, AT&T reported revenue of $30.4 billion, an increase of 1% from the third quarter of 2022. The company reported a 3.7% increase in revenue linked to mobility services, thus helping to maintain its profitability. AT&T’s professional wireline segment has faced decline, with revenue down 10.3% in 2023.

Problems persist for the company, namely that its dividend growth streak was interrupted in 2022 and its dividend has not increased since then. At the same time, its stock price has also fallen by 27.41% over the past five years, offering investors neither steady increasing returns nor capital depreciation, quite the contrary.

Altria (MO)

Altria (NYSE:MO), the manufacturer of the cigarette brand Marlboro is my least favorite dividend king. I think it has all the characteristics of a yield trap. MO’s turnover has eroded significantly and its capital depreciation has led it to pay a dividend yield of 8.91% to investors. This also comes with a dividend growth rate that has moderated to around 4.65% since 2021.

MO’s revenue has seen erosion since 2021 and its shares have fallen 18.19% over the past five years.

The problem with MO is that it offers premium cigarettes that, with the existence of smokeless alternatives like vaping, compete for the same primary demographic as young people, who also prefer to smoke Marlboros. Young people have less disposable income than older generations, and vaping is the preferred choice over more expensive brands. The notion of “dual use” is particularly visible among older generations.

It also failed to enter the smoke-free market due to a series of failed acquisitions, and its long-term trajectory appears uncertain at best.

There are less risky investment choices for investors in this modus operandi, as it is essentially a time trial to make a giant pivot to the smoke-free segment, which will be an unprecedented feat for Altria’s management team, and perhaps for any management team.

Exxon Mobil (XOM)

Exxon Mobile (NYSE:XOM) faces challenges related to the transition to renewable energy, oil price volatility and regulatory concerns.

Just like in the case of MO, I think some investors’ thinking is stuck on what market conditions looked like ten years ago rather than what they look like today. Believing that XOM’s past performance will continue into the future is speculative, given that it faces significant challenges.

To highlight my pessimism about the energy sector in general, I have a portfolio of fifteen dividend stocks and none of them are in this sector. Despite their historically high dividend yields and growth rates, there seems to be too much uncertainty around how giants like XOM will fundamentally change their business model to one that is carbon-free.

An illustration of the short-term downtrend is that five Wall Street analysts agreed that its EPS will fall sharply by 17.49% in fiscal 2027, which also implies a substantial drop in revenue.

Whether or not this specific prediction comes true is neither here nor there. Either way, it signals risks in the energy sector and likely reveals deeper structural problems that exist just beneath the surface.

3M (MMM)

3M (NYSE:MMM) is known for its diversified technology and product manufacturing in various sectors. However, the company faces legal challenges and liabilities related to its chemicals, as well as declining sales in several key business segments.

Don’t get me wrong, I love MMM as a business, given that it is perhaps one of the most diverse companies on the planet. However, I think its dividend is in danger, growing very slowly since 2021. It has negative profit margins and a low free cash flow margin at the time of writing.

The company’s business model is very attractive and its dividend yield of 6.24% can be inspiring due to its earning potential. However, as in the case of XOM or MO, it involves navigating an ocean of high risk and may not be suitable for an investor’s portfolio if they prefer more conservative investments, as the ownership of dividend stocks. So this is one of those companies that investors should reconsider owning.

Ford engine (F)

Ford engine (NYSE:F) is a major automobile manufacturer. Despite its efforts to expand in the electric vehicle sector, Ford faces intense competition from new entrants in the electric vehicle market.

The only exception I have for Ford is that it may be suitable for those comfortable selling covered calls, given that its stock price is only $12.49 at the time of writing. Along with its 3.57% dividend yield, this could help lower cost bases and justify holding if done successfully over long periods of time.

However, for most people who aren’t as actively involved in their portfolio, Ford looks attractive, but it presents deeper problems from a revenue and competition perspective. On the one hand, F experienced a roughly six-year streak of zero dividend growth or dividend reductions. Some of that was offset by its stock price rising about 19%.

The biggest question remains how it will compete with companies like You’re here (NASDAQ:TSLA) and firmly established Chinese competitors like BYD (OTCMKTS:BYDD). Both rule their respective operating segments, in the United States and East Asia, and F’s late start in the industry could prove very significant.

GE Aerospace (GE)

GE Aerospace (NYSE:GE) formerly known as Electric general aviation, operates in sectors such as aviation, energy and renewable energy. While GE has restructured to focus on its core areas, its high debt and legacy obligations continue to pose financial challenges.

GE is perhaps one of the most well-known companies out of favor in the dividend investing community, having achieved its Dividend Aristocrat status over the past year. GE is also concerned that it was the worst-performing component of the S&P 500 last month, and I think its problems will get worse.

The company trades at a high valuation, at 53 times earnings, and its liquidity ratios are questionable with its quick ratio of 0.7. Over time, it has managed to balance its books with roughly equal measures of debt and cash, but the fact remains that it is highly leveraged.

Its valuation alone makes it a problematic buy, and I think it could be sold heavily as a result if the overall market deteriorates.

Kraft Heinz (KHC)

Kraft-Heinz (NASDAQ:KHC) is a large food and beverage company. The company has struggled to maintain brand relevance as consumer preferences shift toward healthier, more sustainable options.

Additionally, the company has experienced fluctuations in its financial results. For example, diluted EPS fell 15.3% from the prior year, highlighting the ongoing challenges in achieving consistent financial growth.

Kraft Heinz has also faced issues related to environmental sustainability and been involved in legal challenges, such as a large settlement related to securities litigation. Such factors not only affect the company’s finances, but can also impact its reputation and consumer trust.

Although the company’s stock price has increased by 12.71% over the past five years, its future is uncertain and speculative as healthier alternatives emerge. When your key brand is about a product that everyone associates with being unhealthy, making such a change may be an unreasonable task. This is why KHC is one of those dividend stocks to avoid.

As of the date of publication, Matthew Farley did not hold (either directly or indirectly) any positions in any securities mentioned in this article. The opinions expressed are those of the author, subject to InvestorPlace.com Publishing Guidelines.