The Price of Dividends

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Dividends are a crazy thing. In a lot of cases, what you see in the stock screener and what you get from the company aren't even the same thing. Beyond that, some of the highest yields come at the highest costs, and I'm not talking about the share price. This article is about some companies that pay high dividends but that may end up losing you money. Don't make the mistake I used to.

For starters, I set my screener for stocks that pay upwards of a 10% dividend that had estimated earnings per share growth over the next one and five years. Like any earnings growth. I didn't get one match, and that's not promising. Hopefully that's just because the analysts aren't bothering with these companies. Yeah, let's be positive.

I turned down my hopes, opting for P/E ratios under 20 and beta as high as it may go (I was curious). I got some real whoppers this time.

Whiting USA Trust I (NYSE: WHX) produces a whopping 38.5% dividend. Take a moment to drool while you consider an investment that pays for itself in less than three years without regard for capital appreciation. Okay, control yourself. Why is the payout so high, particularly with price/book ratio of 2.6. Normally, a price/book isn't a huge reflection of a business, but this isn't a business; it's an ownership interest in oil and gas wells. The operation is conducted by Whiting's parent company, making this really strange. How can a higher-priced company still rock a crazy-high dividend? It's been paying steadily since May 2008, so it's not the regularity. Truth be known, I have a feeling that investors as a whole have been fleeing from Whiting because of doubts about its continued capacity to produce oil and natural gas, with a little extra worry tacked on because of the wild nature of commodity prices lately. I may have to look into this further, as I can't immediately see anything wrong. If I missed something, let me know in the comments.

Charm Communications (NASDAQ: CHRM) came up with a 31.2% dividend. Located in China, this is the largest TV ad company in its native country. The good news is that China has a huge market with TV accounting for nearly three quarters of all advertising. The bad news is two-fold. One, there are questions from a lot of investors about whether earnings reports from Chinese companies are actually reliable. As sad as it is, many countries have very little oversight that benefits individual investors. Secondly, this massive apparent dividend was a flash in the pan. It was paid in April of 2012, and it had neither precursor nor any indication that it would be repeated in the future. That's pretty sad, but it's also a good lesson on keeping your excitement down.

YPF Sociedad Anonima (NYSE: YPF) carries an awesome 30.7% dividend. With its 4 P/E ratio and .7 Price/Book, it looks nice. Unfortunately, I see two problems here just like I did with Charm. YPF is undergoing renationalization, which is pretty likely to take its earnings out of investor hands. On top of that, expecting a nice income from this company is a pretty rough ride because the dividend frequency has been all over the place. With four dividends per year (although at irregular dates) for years, the deal broke down in 2002. Since then, there have been several years with only a single dividend payment, and no year since 2002 has seen more than two payments. I care too much about my money to worry about it like this, so I'll pass.

Southern Copper (NYSE: SCCO) racks up a very respectable 28.5% dividend. It also boasts the Cananea mine in Mexico, with the longest remaining mine life of any open copper mine in the world if its production continues as it's been. Southern Copper is also ranked in the top ten companies on earth for copper mining and smelting. Beyond this, Southern Copper is also big into zinc, silver and molybdenum. So far so good. As well, Southern Copper has kept up its dividend on a reasonable quarterly basis since 1996. One piece of bad news, however, is that the dividend payout amount is completely up to the Board of Directors. In May 2012, it was $.53 per share. In August, it was $.24. If you're expecting a smooth and steady dividend, you're out of luck.  Beyond that, Southern Copper's beta is 1.77, so the share price is pretty unpredictable. This is an antacid stock if ever I've seen one. The company's 16.71 P/E ratio and share price of 5 times book value mean it's not exactly a super-great deal, either. Again, I can do better.

I'm legitimately considering Whiting, though I will hesitate until I know why its parent company decided to spin it off into a trust the way it did. There's a lot more research to do before I can whole-heartedly recommend it. I can easily recommend, however, that you give the rest of the companies in this group a wide berth. A dividend in the hand is worth many in the bush, as the saying goes. Okay, it doesn't, but I remember how many "great" dividend-payers crashed and burned in 2008. Keep your head together, your research solid and your drool bib in place and you should be fine.


pongun has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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