Companies in getting sued by customers are the dividend stocks to avoid. Shareholders who sue the company are less serious. In either case, they are still an unnecessary distraction that might cause management to lose focus.

When the three-month treasury yield is 5.096%, investors could buy risk-free government debt instead of dividend-paying companies with legal issues. Still, the stock market will tempt investors with discounted companies trading at multi-year lows.

The astute investor should not take the bait. The steep margin of safety is not enough to compensate income investors for buying companies that may under-perform stock markets for longer.

Taking a loss is never easy. Few investors will admit they made a mistake. But by freeing up capital out of companies that will keep falling, investors may seek better opportunities instead.

3M (MMM)

3M (NYSE:MMM) is stuck fighting in court in a growing battle regarding its earplugs. More than 200,000 military service members blame 3M for its ear plug not working.

Aearo Technologies made the product. 3M acquired the company in 2008. Since 2018, it lost against the plaintiffs brought upon by 12 service members. It won six cases.

At a global industrials conference, 3M said the earnings guidance for 2023 excludes the potential cost of litigation related to the earplugs. It issued an EPS guidance of $8.50 to $9.50.

The company is also defending itself over the use of toxic substances. This includes perfluoroalkyl and poly-fluoroalkyl substances. California wants to recoup cleanup costs related to those “forever chemicals.”

Chief Financial & Transformation Officer Monish Patolawala said that China’s reopening from the Covid lockdown is slow. The company hopes that China’s economy will improve by the second half of the year.

Since consumer electronics demand is soft in China, expect 3M to under-perform.

Johnson & Johnson (JNJ)

Johnson & Johnson (NYSE:JNJ) rallied from around $150 to over $165 when it refiled for bankruptcy for LTL Management. It established LTL responsible for holding and managing the legal claims related to cosmetic talc.

On April 4, 2023, J&J re-filed for voluntary Chapter 11 bankruptcy protection. J&J said that the reorganization would resolve all claims, after agreeing to contribute up to $8.9 billion.

This amount is payable over 25 years. The amount will cover all current and future talc claims with $6.9 billion. This is $2 billion above the previous commitment amount.

Stock markets bid JNJ stock higher after the news. However, this is one of the dividend stocks to avoid because the settlement is not a positive development. The market likes the removed uncertainty.

However, the stock pays a dividend that yields just 2.73%. In addition, the price-to-earnings ratio is nearly 25 times.

Investors should buy other drug manufacturers with lower litigation costs and whose stock pays a higher dividend yield.

Medical Properties Trust (MPW)

Medical Properties Trust (NYSE:MPW) is a real estate investment trust. It faces shareholder class action lawsuits.

Last month, Medical Properties sued a short-seller, Viceroy Research, and its members. Its claims include permanent injunctive relief and punitive damages on the grounds of “defamation, civil conspiracy, tortious interference, private nuisance, and unjust enrichment.”

The bears have a sound bet against MPW stock. The short float is 19.28% of shares. In the last decade, shares traded in a range of around $10 to $16. During the pandemic, investors bet that healthcare facilities would thrive. The stock peaked at around $24. More recently, the stock traded as low as $7.10 before rebounding slightly.

MPT sold its Healthscope portfolio for AUD$ 1.2 billion. It will use the cash proceeds to pay back a loan that matures in 2024. Risks are increasing that the company’s net asset value could decline compared to its stock price. Bears are confident that the company will need to sell assets at a discount to cover its debt.

On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.