2 Risky Dividend Stocks to Avoid (and 2 Safe Ones)

Dividends stock with too much debt leverage are vulnerable.

Not all dividend stocks are created equal. Some dividends are simply more sustainable over the long run. Better yet, some companies can sustain and grow their payouts over time. Investors who rely on these corporate payouts need to pay close attention to dividend sustainability and growth. 

With that in mind, here are the two dividend stocks you should avoid and two safe ones you can add to your watch list in 2023.

a person watches a downward arrow crash through the floor

Source: Getty Images

Risky dividend stocks

Companies that have borrowed too much and face declining earnings are probably the riskiest stocks. That’s because higher interest rates have made debt more expensive. If earnings decline, the company’s management has to make the difficult choice between rewarding shareholders and paying off creditors. 

Commercial real estate investment trusts are particularly vulnerable, in my view. These entities face declining rental income as offices remain shut and abandoned. If a recession hits, retail locations and malls could face a similar decline. 

Stocks like True North Commercial REIT and Slate Office REIT have already cut their dividends this year. Investors should keep a close eye on this trend. If office valuations decline or rental income slides further, these stocks could have more pain ahead.  

Safe dividend stocks

Companies with essential products and services are much better insulated from economic headwinds. A company with a robust track record of dividend growth and recession-resistant business model should probably be on your dividend income watch list in 2023. 

Fortis (TSX: FTS) is the perfect example. One of Canada’s largest utilities, Fortis sees stable revenue regardless of economic conditions. Consumers must pay their utility bills even if growth slows and unemployment rises. 

Fortis has managed to sustain and expand its dividend for 50 years. It currently offers a 4% dividend yield, which is excellent in this environment. 

Nutrien (TSX: NTR) is another reliable Dividend Aristocrat that should be on your watch list. The world’s largest supplier of fertilizers is likely to see steady growth for decades as the global population expands. Climate change is also reducing the amount of arable land, which means farmers must seek out more efficiency from existing properties. 

Nutrien offers a 3.5% dividend yield, which isn’t exciting but is certainly reliable. The company’s stock trades at just 4.7 times earnings per share, which means it has plenty of earnings to better reward shareholders in the years ahead. 

Keep an eye on this forgotten opportunity. 

Bottom line

If you’re a dividend investor, forget about yield and focus on sustainability or growth. Companies often cut their dividends when the economic cycle turns. I believe this is likely to happen to some of Canada’s highest yielding dividend stocks, especially in commercial real estate and energy. 

Meanwhile, essential businesses like Fortis and Nutrien are not impacted by the economic cycle. They both have track records of dividend growth that stretches back decades. If you’re looking for a safe place to park your cash and expand your passive income, these Dividend Aristocrats are probably your best bet. 

Fool contributor Vishesh Raisinghani has no position in any of the stocks mentioned. The Motley Fool recommends Fortis and Nutrien. The Motley Fool has a disclosure policy.

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