Is It Time to Buy the 8 Worst-Performing Dividend Stocks of 2021?

This year may end up being a rewarding one for the market as a whole. But not every name participated in the bullishness. As of Dec. 14, in fact, some familiar dividend-paying names are well in the red this year despite the S&P 500‘s (SNPINDEX: ^GSPC) year-to-date gain of about 23.4%.

Many veteran investors are of course curious about these sell-offs, as that’s often the time to step into a stock — when the market’s erroneously given up on a ticker. But before you jump into these beaten-down stocks that happen to have above-average dividend yields right now, you may want to read this story first.

Image source: Getty Images.

Worst of the worst

The sellers have been seemingly indiscriminate about their favorite targets this year — at least at first glance. In looking a little closer at the S&P 500’s worst-performing stocks that pay a meaningful dividend, however, a trio of themes emerges. These are the trends that would-be buyers may want to consider before diving in.

The least bad among the big large-cap dividend payers so far this year are pharmaceutical stocks. As of mid-December, Viatris (NASDAQ: VTRS), Amgen (NASDAQ: AMGN), Merck (NYSE: MRK), and Bristol Myers Squibb (NYSE: BMY) are in the red, with the most egregious losses among these being the 31.6% year-to-date loss being nursed by Viatris.

Company
Stock Performance (YTD)
Dividend Yield (Year-End 2020)
Dividend Yield (Today)

Viatris
-31.6%
NA
3.43%

Amgen
-7%
2.7%
3.63%

Merck
-5.5%
3.1%
3.74%

Bristol Myers Squibb
-4.1%
2.9%
3.63%

Data sources: FINVIZ and Macrotrends. YTD = Year to date as of Dec. 14.

There’s not an obvious common thread with these stocks, but since none of these names were waist-deep into COVID-19 vaccines and treatments, investors weren’t especially interested. Notably, shares of major COVID-19 names like Pfizer and Johnson & Johnson are up 50.9% and 8.2%, respectively. J&J’s run isn’t all that impressive, but bear in mind that it rallied nicely in 2020 after the initial pandemic-prompted sell-off.

It was also a tough year for telecom. AT&T (NYSE: T) fell roughly 22.5%, while shares of rival Verizon (NYSE: VZ) are off to the tune of 13.8%.

Company
Stock Performance (YTD)
Dividend Yield (Year-End 2020)
Dividend Yield (Today)

AT&T
-22.5%
7%
9.33%

Verizon
-13.8%
4.2%
5.05%

Data sources: FINVIZ and Macrotrends. YTD = Year to date as of Dec. 14.

Blame AT&T, mostly. It finally sold the majority of DirecTV satellite cable operation to a private equity outfit, and it’s soon going to shed its WarnerMedia arm to Discovery. But it’s getting out of both entertainment businesses at steep losses. Verizon isn’t suffering anything close to the same sort of fate. Verizon shares, however, appear to have been infected by industrywide weakness. It’s a curious weakness, considering that falling interest rates should have buoyed dividend-paying stocks like these.

Finally, add food companies Campbell Soup (NYSE: CPB) and Conagra Brands (NYSE: CAG) to your list of dividend-paying names that have been beaten to a pulp. The former is down a little more than 10.9% since the end of 2020, while the latter is lower by about 10.4%.

Company
Stock Performance (YTD)
Dividend Yield (Year-End 2020)
Dividend Yield (Today)

Campbell Soup

-10.9%
2.9%
3.44%

Conagra
-10.4%
2.7%
3.85%

Data sources: FINVIZ and Macrotrends. YTD = Year to date as of Dec. 14.

It’s no real secret why these and other food stocks are struggling — inflation. The higher prices consumers are seeing in their grocery store aisles merely reflect higher prices of ingredients and higher freight costs. Indeed, packaged food producers aren’t even passing along all of their cost increases to their customers. The market’s only adjusted these stocks’ prices to reflect this new pressure on profit margins.

Again, no two companies are alike. Two companies operating in the same sector, however, are more alike than different, and most stocks in such an industry grouping tend to move as a herd more than they move as an individual entity. That’s why investors may want to focus on these sector-based dynamics at least as much as they do on these individual companies’ stories.

There’s always more to the story

In this light, are any (or all) of these eight steeply sold-off dividend stocks a buy after their respective pullbacks have pushed their dividend yields higher?

Maybe. But it’s not just because they’re deep in the red for the year so far.

These yields are tempting, to be sure. If a stock or sector is struggling, though, that may be the market’s way of telling you something. Part of that warning may simply be that there’s more downside left to price in before a major, buy-worthy bottom is made.

Take the aforementioned food stocks like Campbell Soup and Conagra as an example. At one point the inflation we’re currently facing was described as “transitory.” It’s looking less and less temporary, though. While the pace of price hikes is expected to slow going forward, the U.S. Department of Agriculture’s long-term inflation forecasts suggest prices are only going to stabilize near their currently high prices, with inflation rates themselves poised to hover above 2% for the next decade.

That’s above the pre-COVID-19 pace of price increases, near-term and long-term. As such, continuing to shell out their current dividend payouts could put a serious strain on these names.

Pharmaceutical companies like Merck and Amgen are a different story. While the knee-jerk love affair with coronavirus vaccine makers is understandable, the en masse shedding of other pharma names isn’t. These two companies along with Bristol Myers Squibb are all on track to grow their top and bottom lines this year as well as next year, despite not jumping head-first into the COVID-19 race. This resiliency leaves them primed to bounce out of sell-offs that weren’t particularly well thought out.

As for Verizon and AT&T, they’re something of a split decision. Given the sheer uncertainty of AT&T’s future — and future dividend — income investors would be wise to explore any other option until there’s some clarity about the post-split company’s ability to pay that dividend. Verizon’s not in the same boat, yet seems to have fallen in sympathy. Investors are apt to spot this misstep sooner than later, making it a compelling prospect while its yield is a sizable, sustainable 5.1%.

Of course, this is the sort of thinking all investors should be doing all the time. Big pullbacks are buying opportunities, but they’re only good opportunities if the pullback is a mistake. Some are. Others aren’t.

Or, said in simpler terms, the scope of any recent sell-offs is only one of several details to consider before going shopping for income. That’s never not been the case, though.

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James Brumley owns AT&T. The Motley Fool owns and recommends Bristol Myers Squibb. The Motley Fool recommends Amgen, Discovery (C shares), Johnson & Johnson, Verizon Communications, and Viatris Inc. The Motley Fool has a disclosure policy.

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