Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Defensive Stock Market Investing: Seven Signs Your Dividend is in Trouble

Companies / Dividends Jun 15, 2010 - 06:26 AM GMT

By: Money_Morning

Companies

Best Financial Markets Analysis ArticleMartin Hutchinson writes: Both the U.S. stock market and the U.S. economy are navigating rough waters right now.

U.S. employment, which had appeared to be moving into rapid expansion, suffered a setback in May, with the economy creating only 41,000 jobs. Meanwhile, the stock market - even with the recent rebound that brought it back to the 10,000 level - remains more than 15% below its cyclical high.


That's been the uncomfortable pattern: One economic report points toward a continued U.S. recovery; the next one points toward recession. Sometimes the contradictory research is separated by a single day, other times they are just hours apart. The resultant uncertainty is whipsawing U.S. stock prices - and is leaving investors feeling shaky.

Fortunately, there is a ready remedy, not to mention a place of refuge, from this kind of grinding uncertainty - high-yielding dividend stocks.

When Dividends Matter
In bull markets, dividends become more or less irrelevant. When the Dow Jones Industrial Average traded above 14,000 in 2007, very few stocks had a dividend yield of more than 5%. Indeed, at the peak of the 1998-2000 bull market, the yield on the stock market as a whole dropped close to 1%. Investors in such periods are seeking the next excitement, which will provide short-term capital gains. In 2000, they were looking for such excitements mostly from tech companies; in 2007 they were looking for excitement mostly from leveraged positions, perhaps through private equity or hedge funds. Either way, dividend yields played little role.

As we saw after 2000, again in 2008, and are to some extent seeing today, chasing after short-term gains is not the way to maximize investment returns. While you can do well during the bull phase - that is, when all shares of a particular type are rising - the losses that you'll suffer when the stock market turns will be horrendous.

Indeed, those losses can damage your portfolio enough that it never recovers.

On the other hand, dividend-paying stocks provide better long-term returns in all but the most extreme bull markets. If the market is flat or gently rising, the dividends themselves provide a nice yield and possibly capital gains that easily outpace any modest capital gains generated by the broad market. If the markets decline, the dividends provide an excellent protection against outperforming the market on the downside.

A tech stock that trades at a high valuation and that pays no dividend can lose essentially all its value, even without going bust. If you want an example, just look at telecommunications-equipment-maker JDS Uniphase Corp. (NASDAQ: JDSU).

JDS is still a billion-dollar company - its fiscal 2009 sales were nearly $1.3 billion and its current market cap is roughly $2.5 billion - but the firm has still seen its share price plummet from $1,100 a share to the single-digits after the tech-stock bubble burst in 2000.

If a company is solid enough to pay a good dividend - and can demonstrate that it has the wherewithal to continue to do so - a share-price decline of that magnitude is very unlikely. Build yourself a diversified portfolio of similarly solid dividend payers and you'll be exceptionally well protected.

The Seven Signs of Trouble
The one difficulty with income investing is figuring out whether the dividend is solid. You need to be very confident of the company itself and of its long-term prospects before investing. Some warning signals that a dividend may be in danger include the following:

•A "payout ratio" greater than 100%: If a company is paying out more in dividends than it is likely to earn, a dividend cut is almost certainly in the offing. Avoid dividend stocks with high price-earnings (P/E) ratios, and especially companies that are either making losses, or that are expected to.
•"Extraordinary items" in last year's income: If the company divested a subsidiary, or had an exceptional year, it may have paid a special dividend to celebrate. That special dividend is unlikely to be repeated.
•Highly cyclical industry in credit crunch or downturn: Towards an end of an economic cycle or apex of a market upswing, cyclical companies often have so much cash that they don't know what to do with it all. If the company you own shares in opts to make an acquisition at pricey, market-top prices, consider yourself unlucky. On the other hand, if the company has a savvy, shareholder friendly management team, the company will pay out some of that cash in the form of a big dividend, consider yourself to be on the "lucky" side of the shareholder ledger. But just make sure to remember that the payout isn't likely to be repeated once the formerly bullish upswing reverses course and heads lower.
•The loss of patent protection: If a pharmaceutical company has been highly reliant on revenue from a particular "blockbuster" drug, and that blockbuster comes off patent next year, the dividend is likely to be cut as earnings will decline. Some companies in other, non-pharmaceutical sectors have concessions to operate in important markets that may produce a similar effect.
•Political pressure on the company's business sector: BP PLC (NYSE: BP) has a very nice dividend yield right now - in the neighborhood of 11%. Even so, BP's shares should be avoided until we're sure that the Gulf oil spill is sorted out, because the Obama administration is trying to strong-arm BP into eliminating its dividend in order to make sure it has enough cash to pay for the cleanup. Just yesterday (Monday), in fact, the stock sold off an additional 9.7% on fears of that dividend cut. Uncertainty is bad for stocks, and with BP there's more than enough uncertainty to go around.
•Big one-time write-offs: Companies will present their earnings with big write-offs hidden as "extraordinary items" and eliminated from earnings comparisons. But beware: Going forward, companies may be more careful about paying out dividends on such "operating" earnings.
•Unsustainable earnings: Some analysts and trading services are currently recommending Hatteras Financial Corp. (NYSE: HTS), which invests primarily in government-guaranteed mortgages and has a current yield that's better than 16%. However, a close look shows that HTS makes money for one reason - it capitalizes on the steep "yield-curve differential" between short-term and long-term interest rates. In other words, Hatteras Financial borrows short-term money and invests in long-term mortgages. Since even U.S. Federal Reserve Chairman Ben S. Bernanke can't keep short-term rates at their current level - near 0% - forever, the time will come when those benchmark interest rates have to rise. And when that happens, HTS will see its profit potential take a major hit. Indeed, the company may even make losses as the capital value of its mortgages declines. Speculate on HTS by all means, if you want to, but recognize that the juicy yield won't last.

Some Safe Havens to Consider
In my "Permanent Wealth Investor" advisory service, I refer to companies with high-yielding dividends - whose dividends are safe and stable, and whose stock has some upside promise - as "Alpha Bulldogs." To underscore that this analysis isn't just a theoretical exercise, allow me to take a moment and say that - in my "Permanent Wealth" service - I invest primarily in Alpha Bulldogs, a number of which boast yields that are well into the double digits. Our total return has substantially outperformed the market, and I expect that performance to continue.

Allow me to round out our dividend discussion by suggesting a couple of companies whose high dividends look safe:

•Pepco Holdings Inc. (NYSE: POM), the utility serving the Washington, D.C., area, which has a dividend yield of nearly 7%.
•CenturyTel Inc. (NYSE: CTL), a telecom company with a dividend yield of 8.5%.
•Cherokee Inc. (NYSE: CHKE) a clothing-licensing company with a yield of 8.4%

Source: http://moneymorning.com/2010/06/15/defensive-investing-6/

Money Morning/The Money Map Report

©2010 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in