The Pitfalls of High-Yield Stocks: Trouble Brewing for Investors The Pitfalls of High-Yield Stocks: Trouble Brewing for Investors

Written By Michael Gary Scott

Dividends, along with share buy-back programs, can be lucrative for shareholders of a cash-generating company. Companies like Apple (NASDAQ:AAPL) exhibit this balance by offering dividends and robust cash returns to investors. While high-yield stocks across various industries seem alluring, they can often be treacherous traps, especially prevalent in sectors with substantial free cash flow, including technology and oil and gas.

However, investing in a high-dividend stock solely based on its yield carries risks. A sizable dividend may lose its appeal if the stock price faces market headwinds, and a current juicy dividend does not guarantee long-term sustainability.

The Downfall of Peoples Financial Services (PFIS)

Illustration of the inside of a bank. Bank stocks.

Peoples Financial Services (NASDAQ:PFIS) operates as a holding company for Peoples Security Bank and Trust Company, providing retail and commercial banking services primarily in Pennsylvania. Despite boasting a dividend yield slightly above 4%, the company pays out a 0.41/share dividend every quarter.

In a significant development, Peoples Financial Services announced a merger with FNCB Bancorp, aiming to enhance its earnings per share (EPS) by 59% and dividends by 51%. However, challenges loom as the bank’s revenue and net income have declined, attributing to intense competition forcing higher deposit rates and resulting in shrinking net margins. Consequently, PFIS shares have plummeted nearly 20% year-to-date.

Kearny Financial (KRNY): A Tarnished Promise

A pink piggy bank sitting on three stacked textbooks with a green chalkboard in the background.

Kearny Financial (NASDAQ:KRNY), founded in 1994, offers full-service banking across New Jersey, Brooklyn, and Staten Island. With a dividend yield nearing 7.8%, the company issues an 11 cent/share quarterly dividend.

Despite the allure of a high dividend, recent financial reports reflect a decline in loan receivables and deposits, coupled with ongoing net interest margin compression. Consequently, KRNY’s share price has tumbled over 38% year-to-date and nearly 60% over the past five years, casting a shadow on shareholder returns despite the attractive dividend.

Eagle Bancorp (EGBN): A Nest of Disappointment

Eagle Bancorp

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Eagle Bancorp Faces Challenges Amidst Declining Deposits and Loan Assets

Eagle Bancorp Faces Challenges Amidst Declining Deposits and Loan Assets

A Community Bank on Rocky Shores

Eagle Bancorp (NASDAQ:EGBN) stands as another community bank with its roots firmly planted in Maryland and a network stretching across the Washington D.C. metropolitan area. The bank’s repertoire includes a wide array of commercial and consumer lending products, covering areas from mortgage loans for aspiring homeowners to funding solutions for businesses looking to bolster their working capital or invest in equipment.

Storm Clouds Gather

Regrettably, despite its rich tapestry of offerings, Eagle Bancorp finds itself weathering a persistent storm of challenges. The latest quarterly report for 2024 reveals a disheartening trend of diminishing deposits and loan assets. To compound its troubles, the bank has grappled with a noticeable increase in non-performing assets (NPAs) as a share of its total assets since the close of Q4 2023. Furthermore, the bank’s net margins have felt the squeeze as customers demand greater returns on their deposits.

Stock Price Plummets

The woes faced by Eagle Bancorp are further underscored by a sharp decline in its stock price, which has plummeted by a staggering 41.6% since the beginning of the year.

On the date of publication, the writer did not hold any positions in the securities mentioned. The expressed opinions are solely those of the writer and adhere to the guidelines of InvestorPlace.com.

The author, an avid financial markets enthusiast since his college days, harbors a keen interest in unraveling intricate systems to aid others’ comprehension. His expertise spans the realms of semiconductor and enterprise software equities, having traversed investing landscapes both in public and private markets and investment banking.