Don't let these stocks sink your portfolio

Here are some companies facing serious headwinds, but you wouldn't know it from their glittering dividends.

By StreetAuthority May 15, 2013 5:53PM
Image: Mouse trap with money (© Ingram Publishing/SuperStock)By David Goodboy

Consumers have an insatiable appetite for new and better products and services, and they tend to reward the companies that fulfill their desires.

However, shifting consumer preferences can erode brand loyalty at even the best-loved companies. When this happens, expenses are slashed and dividends are cut as the formerly high-flying company struggles to remain relevant in the ever-changing consumer culture.

Once the dividends start to be cut, yield investors will start to dump the stock, sending share prices downward. The key to avoiding these "dividend trap" stocks is to look for a weakening fundamental and technical situation, when the dividend yield is staying steady or climbing.

Here are two stocks that may become "dividend traps" due to the changing consumer landscape.

Garmin (GRMN)
This manufacturer and marketer of GPS equipment pays a hefty dividend yield of 5%. Generally, this would be a positive -- but in this instance, it signals trouble.
The positive news is the company's net income increased to just under $90 million during its first quarter. This is up from just under $87 million a year ago, representing an increase of about a penny per share.

However, revenue plunged nearly 31% from the previous quarter and was down more than 4% year over year.

Again on the positive side, revenue from Garmin's aviation and marine segments grew solidly from the previous quarter. However, revenue from the auto and mobile segment plunged more than 42% during the same time, and the fitness and outdoor segment also experienced substantial revenue declines.

If you own a smartphone, then you understand Garmin's problem. Smartphones already have GPS software installed, which means consumers no longer need to buy GPS units for personal use. This makes a company like Garmin irrelevant in all but the high-end GPS segments, like aviation and marine applications.

In the technical picture, the share price has bounced from a double-bottom low in the $32 range but has hit resistance at $36.

Darden Restaurants (DRI)
If you have dined at an Olive Garden, LongHorn Steakhouse or Red Lobster, then you are familiar with Darden Restaurants. It is the world's largest full-service restaurant operator, with more than 2,000 locations and $8 billion in annual sales. Although it has an impressive dividend yield close to 4%, this company is starting to exhibit signs that its time in the sun is over.

Diluted net earnings for the third quarter of Darden's fiscal 2013 plunged 18% from the same quarter last year. Overall sales increased slightly by 4.6% from the same quarter last year, but U.S. same-restaurant sales were down 1.6%, 4.1% and 6.6% for LongHorn Steakhouse, Olive Garden and Red Lobster, respectively.

The slippage in same-store sales is a likely signal of restaurant fatigue among consumers. Consumers can patronize the same restaurant for only so long before tiring of it. As I've written before, investors can see this happening with Chipotle Mexican Grill (CMG).

Technically, shares have soared higher this year, but the momentum appears to be slowing in the $53 range.

Risks to consider: Although the signs are clear that Darden and Garmin have run their bullish course and will soon start to decline, no one knows for certain what the future holds. If you sell, you risk potential further upside and dividend appreciation. Shorting these shares can also expose your portfolio to losses should the stock keep climbing. A dividend cut remains speculative. Always use stops and properly diversify when investing.

Action to take: My 18-month target prices are $44 on Darden Restaurants and $20 on Garmin. Neither company has cut its dividends, but their performance and technical pictures signal possible cuts in the next 18 months

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