I wouldn’t touch this ultra-high-yielding dividend stock with a 10-foot pole. Here’s why.

Icahn Enterprises (IEP -5.38%)led by activist investor Carl Icahn, has paid a very attractive dividend yield for years. However, the stock has come under significant pressure since last year, when it was the subject of a prominent short seller and the target of a recent investigation by the Securities and Exchange Commission (SEC).

Icahn Enterprises shares are down 44% from today’s 52-week high, but I wouldn’t touch it now despite the lower price. Here’s why.

The poor performance of Icahn Enterprises

Icahn Enterprises is the holding company of renowned activist investor Carl Icahn. Known as a “corporate raider” for his activities since the 1980s, Icahn invests in underperforming companies that trade at attractive valuations and takes an active role in reshaping the business to unlock more value for shareholders.

A recent example of Icahn’s success was his 2013 acquisition Herbalife. According to CNBC, Icahn made about $1.3 billion from the deal, which he closed in full in 2021.

However, Icahn’s recent performance has been less than stellar. From 2014 to 2023, the investment arm of Icahn Enterprises lost $9.2 billion. One reason for its poor performance was Icahn’s short-selling and hedging activities.

Over the past few years, Icahn has taken short positions, betting on falling stocks or making other bearish bets through instruments such as credit default swaps (CDS) on short commercial securities backed by mortgages.

Despite the disappointing performance, the stock held up quite well. That was until short seller Hindenburg Research published a report on the company in May 2023, making numerous allegations against the holding company. Hindenburg accused Icahn Enterprises of overstating its net asset value (NAV), having a “Ponzi-like” structure and not having enough cash flow to support its distribution. Following the brief report, shares of Icahn Enterprises fell 64% in the following month.

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Icahn’s recent SEC settlement

On August 19, 2024, Carl Icahn and Icahn Enterprises settled with the SEC regarding the commission’s investigation of the company. In an administrative proceeding, the SEC announced allegations that Carl Icahn pledged securities as collateral to secure personal loans and failed to file a Schedule 13D to describe changes to those loan agreements.

The SEC said that from 2018 to the present, Icahn pledged between 51% and 82% of Icahn Enterprises’ outstanding securities as collateral to secure personal loans. However, Icahn failed to disclose these agreements as required in his annual report until 2022. Icahn Enterprises paid a civil penalty of $1.5 million, and Icahn himself paid $500,000 in civil penalties without admitting or denying guilt.

Avoid Icahn Enterprises, buy this instead

My biggest concern about Icahn Enterprises has been its poor investment performance, which is why I was skeptical of the company when I wrote about it last year. Icahn addressed that disappointing performance and told shareholders last year that his returns “would have been much more impressive if we hadn’t gotten away over the last few years from our activist methodology and shorted (covered) a lot more than it was necessary”.

While Icahn may return to his activist roots, I wouldn’t want to stick around for it. On August 26, Icahn Enterprises filed to sell up to $400 million in stock units in a market offering. The move could further dilute current unitholders, and the announced sale comes when the stock is still 75% below its price just before last year’s Hindenburg report.

Not only that, but the company cut its quarterly dividend from $2 per share, which it had been from 2019 through mid-2023, to $1 per share. Although it technically has enough capital to cover its short-term payout, Icahn Enterprises may struggle to maintain its long-term payout, and its current high yield may be an illusion.

While activist investing is a legitimate way to trade and make money in the market, I prefer the classic buy-and-hold approach to long-term investing. For this reason, investors would be better off going with a company like Berkshire Hathawaywho owns numerous cash-generating businesses, has bought and held quality stocks for decades, and has a massive pile of cash to invest when the right opportunity arises.