6 Stocks with Very Dangerous Dividends
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Dividends are an extremely important aspect of long term investing, as they provide additional income to the investor that can be used to reinvest in the company to gain a higher share of dividend distributions with each recurring payout. A strong dividend establishes trust and loyalty with a company’s investors, who are less likely to abandon their investments at the first sign of trouble due to a repeated and consistent return on investment that comes regardless of stock value. In other words, dividends can provide an opportunity for earnings multiple expansion. The following companies have an established history of rewarding their shareholders with consistent high yielding payouts but may no longer be able to sustain the dividends due to diminishing returns or poor management. Sophisticated investors should be aware of the risks facing companies that pay dividends in excess of their earnings. Here is my analysis:
Annaly Capital Management (NYSE: NLY) is a REIT based out of New York City that invests in many kinds of mortgage backed securities. While the interest and principle payments on Annaly’s investments are guaranteed by government backed agencies such as Freddy Mac, the company may finally be feeling the effects of the poor housing market as mortgage lending continues to remain stagnant. Its net income has been falling at a steady rate over recent years from $1.9 billion in 2009 to $1.2 billion in 2010. The first two quarters of 2011 only saw a profit of $700 million, suggesting that Annaly may be unable to pay its dividend if the trend continues.
Chimera Investment Corporation (NYSE: CIM) is tied to Annaly through its subsidiary Fixed Income Discount Advisory Company, which manages Chimera externally. Like Annaly, Chimera is a REIT based in mortgage backed securities, but the company doesn’t directly invest in real estate and places a focus on residential mortgage loans and real estate related securities. Over the past four quarters, the company’s quarterly net income has dropped from $183 million on its December 31, 2010 quarterly to $91 million on its September 30, 2011 report. The current trend puts Chimera in an even more precarious state than Annaly finds itself in this year.
Garmin (NASDAQ: GRMN) is the producer of popular global positioning devices that provide real time step by step travel directions. As competition moves in there is a legitimate concern that the company may not be able to sustain its historic success and its income statements are backing that theory. According to its yearly statements, Garmin made $733 million in 2008 compared to $585 million in 2010. Despite diminishing returns, Garmin stock has risen over the past twelve months but if it loses the ability to pay its dividend, it could suggest that the company is overvalued.
Nokia (NYSE: NOK) is struggling to remain the leading producer of cellular handsets as it teams up with Microsoft (NASDAQ: MSFT) to release a smart phone on the Windows 7 platform. The company recently made it onto the Ten Most Hated companies in America due to mismanagement, diminishing quality and outrage among its shareholders for a drop in 50% of its stock value. Nokia made $5.6 billion in profits in 2008 compared to $1.8 billion in 2010.
CenturyLink (NYSE: CTL) is a telecom company that exists in a dying sector of the telecom market. The company has been buying up other telecoms in a hurry but is fighting a continuing battle as consumers shift away from landline phone service. Speculators question the ability of CenturyLink to remain profitable in coming years.
Windstream Corp (NASDAQ: WIN) is a CenturyLink competitor that is in the same situation as the competing telecom but is only making one third of CenturyLink’s profits. Its profits have diminished from $413 million in 2008 to $313 million in 2010, setting it up for failure unless it is able to stake a claim in more lucrative areas of the telecom playing field.
If you hold a position in any of these companies then you will want to consider how long the company might be able to sustain its dividend and plan an exit strategy that allows you to get out of the stock while it is at its highest point this year. The situation is dire for both telecoms which are competing in a dying market while Nokia may be able to turn itself around if its partnership with Microsoft is successful. Annaly and Chimera appear to be taking on water and it is only a matter of time until the housing crisis catches up with the two REITs and cripples their ability to pay out.
The Motley Fool owns shares of Chimera Investment and Annaly Capital Management. Vatalyst 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.