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Four Stocks to Avoid At All Costs

By , Money Morning •

If you're like most investors, you probably spend most of your time searching for the "next" Apple Inc. (Nasdaq: AAPL) or next Google Inc. (Nasdaq: GOOG) - in other words, the next big winner.

But finding winners is only part of the equation.

If you're looking to build real wealth, you need to avoid the really big losers - like the "next" Enron, or next Lehman Brothers Holdings Inc. (PINK: LEHMQ).

Portfolio killers like those are the stocks to avoid at all costs.

Let me explain ...

How to Win By Not Losing

During my years as a global merchant banker, advisor to governments, financial-news editor and trading-service specialist, I've time and again seen the big losses that can result from arrogant executives (Enron), greed-driven strategies (Lehman) and other investments gone wrong.

But what most investors don't understand is that the fallout from these losses reaches far beyond the losses themselves. You see, that's money that can't be deployed into winners.

As one longtime investing adage tells us, if you suffer a 50% loss on a stock, you need that stock to double in price (a gain of 100%) just to get back to even.

And let's be honest: How many times has one of your stocks doubled - after it took that kind of a beating?

There are many strategies you can use to protect yourself from big losses. Just last week, for instance, I showed you how to bolster your portfolio by investing in companies with strong growth prospects and a record of consistent dividend payouts.

I call those companies "Alpha Bulldogs" - and recommend the shares of the strongest performers to subscribers of my Permanent Wealth Investor advisory service.

In last week's report - "Investment Protection: These Dividend Stocks Yield Twice as Much as Treasuries" - I discussed two specific "Alpha Bulldog" stocks: B&G Foods Inc. (NYSE: BGS), and a second whose identity was withheld specifically for the charter subscribersof our newest premium advisory service - Money Morning Private Briefing.

But as I noted above, finding great investments is only half the battle. In the work that I do for my subscribers, I must also avoid big losers.

The candidates for big investment losses are most often the companies that appear to have an attractive (and sustainable) dividend yield. But close inspection and additional analysis reveals that the company's growth prospects are weak, the balance sheet is distressed, and that the firm's oh-so-juicy dividend payout can't be maintained.

And that means the company's stock is ultimately headed for a major fall.

I refer to stocks such as these as "Mangy Curs."

Four Stocks to Avoid

While you want to find "Alpha Bulldogs" of your own in order to achieve your long-term goals and amass long-term wealth, it's equally important to keep an eye out for "Mangy Curs." These flea-infested, financially rabid companies are easier to spot than most investors believe: The companies typically pay out more than they earn, or have earnings with a strictly finite life, and are essentially cannibalizing capital to pay dividends.

The fact is, these "Mangy Curs" aren't merely unattractive investments: Like any rabid animal, these types of stocks are downright dangerous, and can even be fatal - to your dreams of long-term wealth. Don't be taken in.

To give you a bit of a head start in your search for high-yielding stocks, I've taken the liberty of outlining four "Mangy Cur" stocks that ought to be avoided - despite their lofty payouts.

Those stocks to avoid include:

  • Gladstone Commercial Corp. (Nasdaq: GOOD): This real-estate investment trust (REIT) yields 9.2%, but earns only 17 cents share, while paying quarterly dividends of $1.50. Clearly the extra $1.33 is being paid out of capital, thus liquidating the company.
  • Great Northern Iron Ore Properties (NYSE: GNI): This St. Paul-based trust earns $13.90 a share and pays dividends of $12, for a yield of 11% on a share price of $109. Looks very attractive - until you realize this trust is due to dissolve in April 2015, and there is only about $8 of net assets. Look at it this way: 4 years of $12 in annual dividends = $48 + $8 of net assets = $56 ... that's hardly something you'd want to pay $105 for!
  • Regal Entertainment Group (NYSE: RGC): This Knoxville, TN-based parent of the Regal Cinemas chain pays an 84-cent dividend and has a yield of 6.6%, but earns only 43 cents and isn't expect to increase earnings enough to cover the dividend. And it has a net worth of minus $700 million - so you're not buying it for the assets either!
  • Resource Capital Corp. (NYSE: RSO): The commercial mortgage investment company was once an "Alpha Bulldog." Alas, it now earns only 45 cents per share (don't believe the "adjusted" net income figures!) and pays out $1. Don't get taken by its 17.6% yield.

These are just a small sampling of the many "Mangy Cur" stocks that can trip up investors who are searching for high-yielding stocks - and can lead to the big losses that are so crucial to avoid. Dividend stocks are more important than ever right now, and due to the plunge we've seen in stock prices, dividend yields are on the rise.

For a complete list of the "Mangy Cur" stocks to avoid - and recommendations of the "Alpha Bulldog" stocks you need to add to your portfolios, check out the Permanent Wealth Investor by clicking here.

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