Why You Shouldn’t Invest in Dividend Stocks

The case of SNC-Lavalin Group Inc. (TSX:SNC) is one example why you should exercise caution when choosing dividend stocks.

| More on:
Road sign warning of a risk ahead

Image source: Getty Images.

Dividend stocks are excellent sources of passive income for people building their retirement funds or growing wealth. But to generate a substantial amount of capital, the stock should be paying high dividends. Likewise, you should have a longer time frame to earn meaningful income.

There’s some contention that you shouldn’t rely solely on dividends to optimize returns. You should also be looking at the downsides of investing in dividend stocks. Companies pay dividends to keep shareholders happy and remain invested.

Another reason is that management has no better growth opportunities to invest its retained earnings. However, the most significant risk is when your stock stops paying dividends or implements a dividend cut. 

When that happens, your earning potential diminishes and your stock’s value drops. You might find it difficult to recover your losses. As such, you should be careful in choosing dividend stocks.

Massive dividend cut

Let us take the case of SNC-Lavalin (TSX:SNC). The company was established in 1911 and has since been operating as an engineering and construction firm. SNC-Lavalin provides consulting, design, engineering, construction, and operation, and maintenance services globally. 

The share price of SNC-Lavalin was at $45.85 at the beginning of 2019 and even climbed by 6.1% to $48.65 at one point in January. When the issue of corruption erupted later in the month, it was all downhill for the stock. As of this writing, the price is down to $15.91, or 65.3% lower than the value on January 2, 2019.

But the horrible news to investors came on August 1, 2019. SNC-Lavatin announced an 80% dividend cut on account of the company’s $2.2 billion net loss in Q2 2019. In addition to the dividend drop from $0.10 per share to $0.02 per share, the stock posted a new 14-year low.

The losses of Caisse de depot, SNC-Lavalin’s largest investor with a 20% stake, since January is close to $875 million. The anomaly at SNC-Lavalin will deprive its most significant investor of $11.2 million in dividends. 

Final thoughts on dividend stocks

Several factors could affect the payment of dividends. Apart from a company’s short life cycle, geopolitical risks, heightened competition, integrity issues, and now the trade war could force companies to stop dividend payments or make drastic cuts.

In a rising market, growth stocks could outperform dividend stocks and deliver higher returns. But dividend stocks are better options in a declining market. The case of SNC-Lavalin is lamentable. Investors lost money from the dividend stock 

Rising interest rates could also impact on dividend stocks. If the yield of a 10-year bond increases to 5%, dividend stocks with the same return or lower lose their appeal. Bonds are more or less risk-free investments. Fortunately, we are in a low-interest environment. 

If you’re starting to build your stock portfolio, you should have a longer investment window. Choose dividend stocks wisely to receive a steady income stream. The company should be financially stable and has an excellent dividend track record.  

More importantly, the company must be trustworthy and free of integrity issues that could massively disrupt business operations. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Christopher Liew has no position in any of the stocks mentioned.

More on Dividend Stocks

STACKED COINS DEPICTING MONEY GROWTH
Dividend Stocks

How Long Would It Take to Turn $20,000 Into $100,000 With TSX Dividend Stocks?

Here's how a historical investment in TSX dividend stocks would have fared.

Read more »

edit Businessman using calculator next to laptop
Dividend Stocks

Passive Income: How Much Should You Invest to Earn $100 Every Month

Want to earn an extra $100 per month in investment passive income? Here's how much cash you would need to…

Read more »

Canadian Dollars
Dividend Stocks

Buy 1,430 Shares of This Super Dividend Stock for $1,000/Year in Passive Income

Here's how to generate $1,000 in annual passive income with Dream Industrial REIT (TSX:DIR.UN) stock.

Read more »

A worker gives a business presentation.
Dividend Stocks

Ranking Inflation Rates in Canada: How Does Your City Stack Up?

Inflation rates stoked higher for some cities, but dropped for others. So let's look at how your city stacked up,…

Read more »

Doctor talking to a patient in the corridor of a hospital.
Dividend Stocks

Inflation Is Up (Again): What Investors Need to Know

Inflation ticked higher in Canada this month, but core inflation was lower. Here's how investors can take advantage during this…

Read more »

Happy family father of mother and child daughter launch a kite on nature at sunset
Dividend Stocks

Want to Make $10,000 in Passive Income This Year? Invest $103,000 in These 3 Ultra-High-Yield Dividend Stocks

Can you earn $10,000 in passive income in 2024? You can by investing $103,000 in these ultra-high-yielding stocks.

Read more »

Payday ringed on a calendar
Dividend Stocks

1 Under-$50 Dividend Stock to Buy for Monthly Passive Income

First National Financial (TSX:FN) is a high-yield monthly-pay dividend stock.

Read more »

Increasing yield
Dividend Stocks

Income Investors: Don’t Miss These High-Yield Deals

These great Canadian dividend stocks now offer high yields.

Read more »