High Dividends can be Deceiving
“Chasing yield has become a national pastime,” according to a recent article in Investor.com.
The S&P 500 yield is reportedly down to just 1.93%, from 2.23% yield at the beginning of the year. The yield on the 10-year Treasury is 1.91%, down from 3%. That leaves many investors searching for a golden opportunity.
According to Investor.com, 14 S&P 500 stocks yielding 5% at the beginning of the year, including retailer Macy’s (M), energy company Occidental Petroleum (OXY) and real-estate company Macerich (MAC), fell below the S&P 500 by 20 percentage points or more –meaning disappointing losses for investors.
Dividend stocks are affected by the performance of the underlying business, as well as interest rates. Sometimes, companies with long-term track records of making dividend payments run into short-term challenges that lead to weakness. This decline in stock price has the effect of temporarily elevating the dividend yield, creating opportunities for investors.
“When interest rates rise, dividends may become less attractive to investors, leading to equity outflows in general and particularly selling in dividend stocks,” according to Investopedia.
Although beginning the year strong, with 36 S&P 500 stock paying 5% dividend yields, 10 reportedly declined in value.
In some cases, a high dividend can be a sign that a company is in distress. Investors who buy solely on the basis of the dividend may experience losses as the dividend is cut and the stock price declines in response.
Although retail stocks are struggling due to the massive surge of online shopping, a few investors were likely tempted to invest in Macys’ stock in January with its 5.07% dividend yield, according to Investor.com.
Unfortunately on Aug. 14, the company reported an adjusted quarterly profit of 28 cents a share and Macy’s stock has declined 46.3% this year.
According to Investor.com, Macy’s stock is down so much now its yield is 9.4%.
Another example of this would be real estate stock Macerich, a mall operator based in Santa Monica, CA. In early 2019, Macerich paid a high dividend of 6.9%. Unfortunately, Macerich’s shares have dropped 37% this year.
Energy stocks have certainly fared no better. Occidental Petroleum reportedly offered 5.1% dividend in January, now it is down 37%.
S&P 500 High Dividend Stocks That Backfired This Year (Investors.com)
|Company Name||Ticker||Yield Jan. 1, 2019 (%)||Yield Nov. 12, 2019 (%)||YTD % stock ch.||Sector||Difference from S&P 500 YTD % (price only)|
|L Brands||(LB)||9.3||6.9||-32.8%||Consumer Discretionary||-56.1%|
|Kraft Heinz||(KHC)||5.8||4.9||-23.4%||Consumer Staples||-46.7%|
|Helmerich & Payne||(HP)||5.9||6.9||-16.2%||Energy||-39.5%|
|Altria Group||(MO)||6.5||7.2||-4.8%||Consumer Staples||-28.2%|
|Host Hotels & Resorts||(HST)||5.1||5.0||0.7%||Real Estate||-22.6%|
|Iron Mountain||(IRM)||7.5||7.5||0.8%||Real Estate||-22.6%|
Source: IBD, S&P Global Market Intelligence
Due Diligence on High Dividends
Usually the blue chip stocks have the highest dividends along with a consistent record of producing revenue and income growth over multiple years. While there can be new dividend payers on the horizon, some may start to struggle with their dividend payouts. It’s important to research the financials and operations of the company in question to determine whether the dividend can be maintained.
Important Factors to Research:
- The company’s free cash flow,
- Historical payout ratio,
- Historical dividend schedules,
- Dividend increases and decreases,
- Management’s strategy
- Strength of the company’s overall financial position.
Free Consultation with a Securities Attorney
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