Everything was looking great with my newinvestment .
Thestock had been steadily climbing higher since my purchase
in early January. This company was among the original members of
the S&P 500 and once ranked among theDividend Aristocrats .
Members of this exclusive list have raised their dividends
annually for 25 consecutive years. Talk about a vote of
However, the company was dropped from that list recently. Not
because of anissue with its dividends -- but because it no longer
had the minimum $3 billionmarket capitalization to remain a
In addition,sales had been slipping over the past several
years. Counterbalancing the bad news, the company was still
creating decentcash flow , producing solid returns on
investedcapital and trading at relatively low price.
Entering the position at an average price of $10.50 and
watching it grow nearly 60% to around $16 convinced me that I had
made the right decision, despite the negative undertones on the
Then reality struck.
On April 30, the company announced a 57% decrease in
first-quarterearnings and a 50%dividend slash.
How could have this happened? The company had been increasing
its dividends for over a quarter-century -- and as soon as I
invest, it decides to do the opposite in a big way.
If you haven't guessed, the stock I'm talking about is
Pitney Bowes (
Pitney Bowes is a good example of what can happen to a
high-yielding dividend stock. Even a former Dividend Aristocrat
is not immune.
To keep from falling into a "dividend trap," it's critical
that investors study the fundamentals of the company, not just
the performance of theshares . Look for steadily decreasing
sales, falling earnings andissues with competitors making inroads
into the business. Not to mention, highdebt levels.
In addition, common sense also needs to be applied. For
example, Pitney Bowes' core business of stamp machines and
mailing equipment has been decreasing over the years due to the
growing popularity of email over traditional mail. In retrospect,
it made sense that the company would slash its
Pitney Bowes is far from alone with its decision to slash
dividends. Over the years, venerable companies such as
Eastman Kodak (
J.C. Penney (
Bank of America (
have all fallen from their former status as dividend-paying
Similar dangers face these high-paying firms.
This telecommunications company is the highest-yielding stock in
the S&P 500. It boasts ayield of nearly 12% and amarket cap
of close to $5 billion.
However, thedebt-to-equity ratio is nearly 9%, and thequick
ratio is 0.32. This indicates the companywill not be able to
cover its short-termcash burn. Perhaps most importantly,
thedividend payout ratio is 357%! This means it's paying out much
more in dividends than it's bringing in in earnings.
In the technical picture, the stock just bounced offsupport at
its recent lows below $8, but it remains well below the 50- and
200-day simple moving averages.
BGC Partners (Nasdaq: BGCP)
Shares of this high-yielding wholesale brokerage company, which
deals in the financial andreal estate markets, have soared more
than 50% thisyear and currently yield nearly 8% annually.
On the surface, the company looks good withrevenue growth
beating the industry average and net operating cash flow rising
more than 150% from the same quarter last year.
However, deeper digging reveals an extremely lowprofit margin
of 9.2% and anet profit margin of 1.57%, which is sharply below
the industry average. Most telling is the dividend payout ratio,
which stands at more than 380%, meaning BGC can't maintain the
current dividend without raising more capital.
Risks to Consider:
Dangerous dividendstocks can continue to pay dividends and
perform solidly much longer than their fundamentals would
indicate. The primary risk in culling your portfolio of
questionable dividend payers is missing out on future
Action to Take -->
Check your portfolio for high-dividend yielders and dig into
their fundamentals. Ask yourself if the fundamentals support the
dividend payments. If not, it may be time to jettison those
stocks for those with less yield but better prospects.
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