Buyer Beware: 2 stocks We Are Avoiding & 2 We Are Buying

Despite an overall frothy stock market with the S&P 500 (NYSEARCA:SPY) and Nasdaq (NASDAQ:QQQ) trading at elevated levels not far off their all-time highs, there remain some highly opportunistic names in the high yield space. That said, just because a stock has an attractive looking dividend yield, does not mean that it is necessarily undervalued. Much more research is needed than simply looking at the yield, or even the track record. In this article we will share 2 high yield stocks we are avoiding and 2 high yield stocks we are buying.

2 High Yield Stocks We Are Avoiding

AT&T (NYSE:T) is one high yield stock that we have steered clear of over the past year despite its tantalizing dividend yield. In fact, on May 6th, we released an article highlighting 3 Reasons To Avoid AT&T:

1. The company had (and still has) a massive debt burden that it took on through massive, overpriced, and overleveraged acquisitions of companies like DirectTV which later resulted in large shareholder value write downs.
2. The company also has generated weak profitability for years and therefore has had to reinvest a lot of capital at weak rates of return. Over the long-term this adds up to meaningful underperformance.
3. Simply put, T was not – and still isn’t – cheap. While it is true that the dividend yield and price to earnings ratio look attractive relative to the bloated stock market and historically low interest rates, when accounting for the massive debt on the balance sheet, the enterprise value to EBITDA ratio is actually elevated relative to the company’s history. In fact, at the time we wrote that initial article, T’s stock had downside to the low $20s before it would trade in-line with historical averages on an EV/EBITDA basis. Sure enough, that is where the stock went before its recent bounce back.

Still, T stock has massively underperformed both the SPY as well as the high yield sector (NYSEARCA:DIV) since we wrote that article:

Today, all three factors remain in place and – with management signaling that it will likely slash the dividend at some point in 2022 – there is little reason to buy the stock at this point. While we are not necessarily bearish on it here, we certainly aren’t bullish either.

Another popular high yield stock that we are steering clear of at the moment is Realty Income (NYSE:O). While it is certainly a great company with a history of generating market-beating total returns and very attractive dividend growth, there are simply not enough good reasons to buy it today. For example, here are three reasons why we are steering clear of O stock right now:

1. Inflation is soaring, with December U.S. CPI data at 7%, which turns out to be a 40-year high. Given that only 30% of O’s ABR is linked to inflation, this means that the company will likely be falling meaningfully behind in the purchasing power of its rental revenue stream. While O was a great stock to own in a low inflation, low interest…