Chasing the End of the Dividend Rainbow
Five years ago, the Dow Jones Industrial Average was around to $12,700. Today, the Dow is sitting at around $12,850 - a lofty $150 gain.
Of course, there was a lot of craziness along the way - the Dow went as high as $14,000 and as low as $6,600. In the meantime, regular people have watched their investments in the markets go up, and then down, and then up again. For many, it has been a nail-biting experience.
Given the instability in the price of the markets over the last half-decade, investors have begun parking more money into stocks with high dividend yields. Dividends provide a good hedge against volatility.
Investors looking for safe stocks with good dividend yields generally look for strong companies with yields of around 2-5 percent and sustainable payout ratios, which calculates how much of a company's earnings are paid out through dividends. Recent dividend growth is also an important consideration.
Three major blue-chip stocks that have provided stable dividend yields over the last few years are Coca-Cola (NYSE: KO), Wal-Mart (NYSE: WMT), and Microsoft (NYSE: MFST). Those companies currently have yields of 2-5 percent, payout ratios of 20-40 percent, and solid past dividend growth rates, although it is worth noting that Microsoft only started paying out regular dividends beginning in 2003.
Some people, invariably, are not satisfied with dividend yields of a mere 2-5 percent. They want bigger gains, even if that means turning the idea of dividends as a safety net on its head. Nowadays, when anyone can put together lists of stocks with the highest dividend yields with a couple of mouse clicks, it is easy to find dividend stocks that promise extraordinary yields.
While professional investors at conservative firms like Fidelity would be unlikely to consider investing in CPI Corp (NYSE: CPY) or Transportadora de Gas del Sur SA (NYSE: TGS) right now, with extreme projected dividend yields listed at over 50 percent on most financial sites, the two stocks are likely to raise the eyebrows of adventurous armchair investors.
CPI Corp, which operates professional portrait studios throughout North America, once traded as high as $82.45 in 2007. It now sells for under $2, and is down around 90 percent since the same time last year. It has a market cap of about $11.5 million and has a dividend yield of over 60 percent.
The company maintained a $0.25 dividend per share and an accompanying payout ratio of well in excess of 100 percent during the second half of last year in a bid to attract investors, but its stock price plummeted anyway.
Though it is far too soon to write the company off, its growth prospects appear to be limited – for example, sales last holiday season were extremely disappointing, down 18 percent compared to last year's holiday season. That paints a potentially grim picture for the future.
Last fall, the New York Stock Exchange warned CPI Corp that it needed to raise its market cap to avoid being delisted. Then, in late December, the bad news continued when the company was forced to reveal that it will have to suspend all dividend payouts until it meets certain requirements set by its creditors.
Unfortunately, no one is sure when – or if – that will happen. Unnerved investors have gone as far as to file a class action lawsuit against CPI Corp, claiming management purposely misled the public about the company's health.
Not everyone has counted out CPI Corp. Zacks Investment Research gave the company's stock an Outperform rating only a few weeks ago. However, expecting an actual dividend payout soon could be a risky proposition.
Transportadora de Gas del Sur SA is a natural gas extractor and producer based in Argentina, and has a dividend yield of about 50 percent. With a market cap of over $450 million and a payout ratio of only 12 percent, the company can theoretically afford to deliver such high dividend yields for the time being.
The company's stock price has lost half its value from a year ago, trading for about $3. To keep its stock price afloat, the company may try to maintain a high yield for awhile longer. From 2008-2010, the company had consistent total cash dividend payouts, regardless of its stock price.
Still, a dividend yield of 50 percent simply is not sustainable in the long-term. Sooner or later, that percentage will have to come down.
It should be noted that Transportadora de Gas del Sur SA offered no dividends from 2002-2007, and that a similar spike to a $1.50 dividend per share 1997 was followed by a quick return to $0.50 dividends. What that could mean going forward is that in another quarter or two, if the historical indicators bear out, is that owners of Transportadora de Gas del Sur SA could be stuck with a low performing stock with unexciting dividend yields.
Shares of CPI Corp and Transportadora de Gas del Sur SA probably will not end up in any 401(k)s or IRAs in the near future. Regardless, both present some novel opportunities for investors that are less risk averse.
Just remember that any dividend with a yield that seems to be good to be true demands extreme scrutiny.
Traders that that are not risk averse may consider the following:
- Going long on CPI Corp. If the company gets its financials in order, the resulting dividend yield could be rewarding.
- Going long on Transportadora de Gas del Sur SA, or watching the stock closely immediately after it goes ex-dividend to see if an opportunity arises to jump in at a good, discounted price.
Traders that want safe dividend yields may consider the following:
- Going long on any of the blue chip companies mentioned in this article, or going long on other blue chip companies, such as McDonald's (NYSE: MCD).
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