Ten Top Value Traps with Unreasonably High Dividends

by Alexander Wissel

With the credit crisis ransacking good companies and leaving less stable ones in shambles, some of the metrics used to find good “values” are setting some value traps for investors. Here are the Top 10 Value Traps that have unreasonably high dividends:

Company	Ticker	Yield
Bank of Ireland ADR	(NYSE: IRE)	103.79%
Royal Bank of Scotland Group ADR	(NYSE: RBS)	53.63%
Harvest Energy Trust	(NYSE: HTE)	34.21%
Allied Irish Banks ADR	(NYSE: AIB)	30.21%
Penn West Energy Trust	(NYSE: PWE)	27.66%
Hospitality Properties Trust	(NYSE: HPT)	22.29%
Pengrowth Energy Trust	(NYSE: PGH)	21.66%
The Macerich Company	(NYSE: MAC)	21.11%
Duke Realty Corporation	(NYSE: DRE)	20.90%
Nordic American Tanker Shipping	(NYSE: NAT)	19.99%

If a dividend yield looks too good to be true, it generally is. If the stock price has plummeted, ratcheting up the yield, look for the company to cut its dividend to save money. Even if the firm can support a higher dividend yield, many will choose to reduce their dividend simply by being in an environment where everyone else is. The result: the share price drops even further after investors who expected high yield jump ship. Investors who don’t move fast enough find themselves “trapped” by this falling stock price – hence the term “value trap.”

Comments

[Boubou:]

If they reduce dividends to restore the yield figure to 'normal' at the new depressed price, they will kill any tendency for the pps to recover to its former level.
I'm not sure this is in anyone's interests, least of all the owners.

Jan 15 07:20 AM

[jp17622:]

Not to mention REITS have to pays dividends of at least 90% of their taxable income i.e. Duke Realty. They do not have as much control over their dividends as you imply.

www.streetauthority.co...

Jan 15 07:29 AM

[Billy Ford:]

Stocks plummeting and increased yields doesn't always translate into a company needing to save moeny and therefore slashing their dividend. The key is finding those companys who have fallen victim to the broad market sell-off, but are still in great shape financially, and are yielding great. Good Article though, I'm with you, you have to be leary of something paying in excess of 20%. Something isn't right, that can't be sustainable

Jan 15 08:00 AM

[John Raybon:]

You obviously didn't know much about NAT. They do not need to cut there dividend they have no debt and there dividend changes every quarter so not sure where you came up with 19.99%

Jan 15 08:04 AM

[H. T. Love:]

NAT recently forecast the next dividend at about $0.85. At $32.60 x 4 (if they hold at that level) it comes to about 10.43% (non-compounded). With no debt whatsoever, avererage daily operating cost of $9,000.00, new purchases financed with equity issuance (dilutive, but the acquisitions being always acretive to earnings) and dividends constanly adjusted to the cash flows, I can't see it as a value trap.

Seems to run a lot like my personal finances, which are quite sound.

The only "value trap" here is that constantly declining oil prices may eventually erode the cash flows, reducing the stock price and dividends. However, as less sound companies suffer distress, fleet additions become increasing less expensive (as with the recent purchase of the 1999 tanker), positioning NAT well for the eventual rebound in oil prices.

Jan 15 08:48 AM

[axelrod608:]

Comparing the div yields of Canroys (Canadian royalties) and MLPs (master limited partnerships) with those of "normal" companies is bizarre. Both are legal constructs created to provide funding for operations that by law pays back to investors. Yes, dividend payouts vary with income and yes, in a period of earnings expectations like the current mess, we expect divs to drop.

A while back I bought HTE at a then-current 40% yield. Did I expect it to last ? No. Of course not. If/when oil prices and shipping recover and prices rise, yields will increase.

The beauty of both Canroys and MLPs is that they pay far better yields than you can get elsewhere at low risk. When Treasuries pay 2% and savings and CDs may go as high as 5%, the trusts keep paying 10+%.

Yes, the stock prices go up and down, but if you're investing long term, these are a good deal based on risk/return ratios.

Jan 15 09:42 AM

[DroolingElmo:]

Hard to Love is right on target. You clearly need to do some more research so that you have a full understanding of Nordic American Tanker's business model. It is run exactly the way I would run it if I was on the Board and even though I only own 2500 shares they were willing to have their investor relations department meet with me when I was in Bermuda. It isn't a TRAP it is an OPPORTUNITY.

Jan 15 10:10 AM

[msburko:]

Dear Author (Alexander Wissel)


Is this article meant to frighten or enlighten?
Some of these companies are REQUIRED to pay dividends.

I just bought NAT. Thanks for the price drop.

Jan 15 10:30 AM

[smurphny:]

Selling got overdone on many of the oil/gas trusts. At current prices, even with expectation that distribution will fluctuate, these represent good values. Crude is also nearer bottom than top. Crude at 10=depression and even cash will not be safe unless it's in gold under your bed. Barring this nightmare scenario , it's probably time to start adding these before they DO get to a point of higher risk. The "trap" may be in waiting until too late because when the general market turns up, which will precede the recovery, the value of these will soar.

Jan 15 10:33 AM

[notsosmart:]

this article is nuts.take the yields cut them 50% & you still have a great return.NAT & FRO are still giving good returns.i have no agenda.own both happily.

Jan 15 10:44 AM

[Sweetness:]

MSB, If you attribute today's price weakness in NAT to sellers motivated by its mention in this non-specific, incorrect article, then I must conclude that you have a poor understanding of the market.


On Jan 15 10:30 AM MSB wrote:

> Dear Author (Alexander Wissel)
>
> DO YOUR HOMEWORK!
> Is this article meant to frighten or enlighten?
> Some of these companies are REQUIRED to pay dividends.
>
> I just bought NAT. Thanks for the price drop.
>

Jan 15 11:34 AM

[zorro6204:]

That was a completely useless article. Just list a bunch of stocks that happen to be high yields at the moment, no analysis whatsoever?

Jan 15 12:07 PM

[irbbping:]

I agree with your CANROY comments and own CANROY's. We need to point out, however, that govts can totally screw them up ie Harpers halloween surprise, again the old adage, do DD before you invest.


On Jan 15 09:42 AM axelrod608 wrote:

> Comparing the div yields of Canroys (Canadian royalties) and MLPs
> (master limited partnerships) with those of "normal" companies is
> bizarre. Both are legal constructs created to provide funding for
> operations that by law pays back to investors. Yes, dividend payouts
> vary with income and yes, in a period of earnings expectations like
> the current mess, we expect divs to drop.
>
> A while back I bought HTE at a then-current 40% yield. Did I expect
> it to last ? No. Of course not. If/when oil prices and shipping recover
> and prices rise, yields will increase.
>
> The beauty of both Canroys and MLPs is that they pay far better yields
> than you can get elsewhere at low risk. When Treasuries pay 2% and
> savings and CDs may go as high as 5%, the trusts keep paying 10+%.
>
>
> Yes, the stock prices go up and down, but if you're investing long
> term, these are a good deal based on risk/return ratios.

Jan 15 12:33 PM

[henarl:]

Selling covered calls on these positions, in a generally down market, can easily double your yield. When you are realizing 30 or 40% yield it offsets quite a bit of share price loss.

Jan 15 12:56 PM

[Chris B:]

Be careful. This is how many dividend investors rationalized purchasing banks one year ago. Lehman, Bear Stearns, and BAC all looked good from that hypothetical 50% dividend cut perspective. However, they turned out to be on the verge of massive losses that were certain to wipe out both equity and dividend. That's why their investors were bailing.

Analyze these stocks with the assumption of zero dividend for the next 3 years and only take a gamble if they are still attractive. Business models and financial condition matter more than a hypothetical payout. Also consider that many stocks that don't pay a dividend today will after the recovery, and vice versa.


On Jan 15 10:44 AM notsosmart wrote:

> this article is nuts.take the yields cut them 50% & you still
> have a great return.NAT & FRO are still giving good returns.i
> have no agenda.own both happily.

Jan 15 04:01 PM

[Urbane Gori...:]

I agree completely with the author's statement:

"Even if the firm can support a higher dividend yield, many will choose to reduce their dividend simply by being in an environment where everyone else is. The result: the share price drops even further after investors who expected high yield jump ship. "

If you really like the company... Take your last dividend, sell while you can, buy something else temporarily that has already taken a beating for reducing its dividend. Collect that till your 'favorite stock' gets hammered after reducing the dividend and then buy back in at the lows..... What a deal! Everyone's a winner!!!

jegan

Jan 15 04:34 PM

[Urbane Gori...:]

While I'm here.... How about posting the results of the list . Show today's price, today's dividend yield and then show the stock price and yield in say three months.

I'll bet you my "AAPL $175 April calls" that the author is correct and not only will the yield be wayyyyy down, but so will the stock. Not sure why everyone is hammering them for posting good advice.

jegan ;-)

Jan 15 04:38 PM

[bsharvy:]

This article is pretty uninformed. The explanation of the term "value trap" is completely wrong. It doesn't refer to being "trapped" by a falling price, it refers to a stock that looks like a value stock in style, but isn't because of deteriorating fundamentals. There is no actual REASON given for anything the author says. Why are these the "Top 10 Value Traps?" We're given nothing but cliches, like "if it looks too good to be true, it probably is." A more logical conclusion might be that a stock trading at over 20% yield is already expected to cut its dividend, so such a cut won't affect stock price. For example, PWE cut its dividend yesterday--the stock went up 2% today. Investment U needs to go back to school.

Jan 15 07:55 PM

[Surfer1104:]

I think what the auto of this article may be refering to is when Crammer from CNBC is promoting stocks like Financials for dividends and the stock crashes so that Cramer can cash in on his personal trusts postions. I consider him to be the piped pipper for bad investment. I think if everyone who listened to his advice over the years calculated their losses he would make Madoff look like an innocent chior boy .

Jan 15 09:04 PM

[sr9web:]

PWE and PGH already cut their dividends. Now is the time to start building a position in those names. when oil rebounds later this year, these will move away from you fast and furious.

NAT also looks very good, though HTE has refinery exposure which is a wildcard.

Also, before you know it, the right time to buy HPT will be here.

Suffice it to say, several good names on this list...

Jan 16 12:41 AM

[jayminho:]

sorry, but, the guy who wrote this article is totally uninformed, comapnies like, IRE, have suspended dividends since last two quarters.. and i wouldnt be surprised to find out many on his list, have suspended as well..

Jan 16 03:34 AM

[svosavvy:]

That or take some of your outrageous dividend payout and buy yourself a put. If you're a long term player and don't care about market vicissitudes, buy the put anyway and if you're still in love when it's in the toilet sell the put to someone who is dying to get out of it for good money.

Jan 16 10:18 AM

[Kevin B.:]

FYI - NAT has ZERO debt on its balance sheet, a payout ratio of over 100%, 45 straight quarters of dividend payouts and increasign them, along with a blance sheet that can withstand the tough economic times. I think you could do some more research on the financial statments and history before labeling a stock as a value trap. Even if they cut their dividend down by 50% thats still about 10%+. Not exaclty sure what your looking at, but the frieght rates have bottomed and this is teh best time to be buying NAT - which is the best shipper due to its financial condition. They just had a new shares issued to take advantage of super cheap building prices on freights - this sounds positive not negative along with ZERO debt!! I bet you dont own one stock that has zero debt - tough to find and a must own. Is it ironic that investment banks are going to start buying freights instead of trading oil? I dont think so.

Jan 16 11:49 AM

[Kevin B.:]

NAT's stock has not plummeted - held up quite well actually. FYI

Jan 16 11:50 AM

[johnny inca:]

the best dividends right now are in reits, especially cumulative preferreds. I own PGE-B, it just declared for Q1 2009. it's yiedling over 50% depending on when you get it.

Jan 16 02:46 PM

[Brian Donal...:]

Penn West just chopped to 0.23 per unit in Canada

Jan 16 03:13 PM

[Anthony Alfidi:]

The consistency of the dividend payout is important. Aside from royalty trusts and MLPs, it's hard for "normal" operating companies to pay yields over 10% or so year after year. Shipping stocks (FRO, SFL, and others) that have had good dividend years are now paying stunning yields partly due to their price declines.

Jan 17 03:10 AM

[stockguru32:]

I would expect an obama bump this next week followed by some serious problems, see here crashmarketstocks.com

Jan 17 01:53 PM

[Fliujniligui:]

I buy some AIB every time it sinks. I think M&T bank is a good company and it has a reasonable yield and resilience in this mess. AIB owns 24% of M&T Bank and By putting 1$ in AIB stock, I get the equivalent of 0,8 to 1$ exposure to M&T bank + The rest. That rest is subject to some call to question, but it includes a stake in BZWBK in Poland which is worth 1$ per AIB share. There is value trap there maybe, but some value is still lying there and AIB is a well run business, in any case the best run thing in Ireland Financial world.

There is no reason to buy IRE except to expose one to higher risk of nationalization, capital raising being more dilutive and underperformance being more intense. IRE is the value trap there.

Jan 17 04:01 PM

[michael fro...:]

i had HPT but jumped out when i found the cash on hand getting low, they got a great way of making money and the truck stop deal is like taking candy from a baby...but they gave the truckstop company leeway not to pay right away....so that could be a slight problem.

as for NAT.....obviously there are plenty of us in here who follow NAT, and if the wrier of this column can help me get more NAT at cheaper prices, i'm for it. but fellas remember not to fall in love with your stocks. NAT is already undervalued in my opinion. if it was trading near it's true value it wouldn't of made the high dividend list.

Jan 17 09:29 PM

[michael fro...:]

as for whether a company can pay the yield....you guys are looking at yield the wrong way. yield is a just a measurement tool, say you have a $100 stock price and it has 100 outstanding shares. each share gets $1.00 (1% yield)
the company pays out for the quarter $100.00
the share price falls to $10, the outstanding share count is still 100, the company still pays $1.00 (10% yield).
the company still pays out for the quarter $100.00

for the investor with a buy n hold mentality, he still gets his $1 divy/share but it cost him more, than someone just getting on board who only has to pay $10 for that $1.00 divy
yield is a measurement for the investors not for the performance of the company.
the announcement of what the divy will be is based on earnings "per share", and profits,
let's look at BAC and their divy, reason it keeps getting cut, they keep buying up/merging with these other companies, so the outstanding share balance has been rising...hence more shares less divy to go around.

Jan 17 09:49 PM

[happyfella:]

So very true, yet ,when Bank of America was at 29 with a high dividend yield my calculation estimated that they would cut the dividend and the stock would trade at real value of 18. now they are trading below 8. When country wide was trading at 50 its dividend was above 22 % yield. I shorted and and covered in a 2 point range all the way down to 30. This is when the public (professionals) became aware of the mortgage demise.

Last year, my entire investments returned 24%. This includes ROTH.SEPIRA,and individual accounts.I had left all long positions in September of 07. This year my plan is to harvest dividends since the S&P will be plus or minus 5%.The GE's,utilities, and defensive companies are still paying higher than normal dividends.but I still hedge with Elf's after market rallies. This strategy will soon be over- used and will have to hedge with collar options.
Too a profitable 07 asb

Jan 18 08:22 AM

[Pessimistic...:]

Ok folks.. here is what I have seen, heard and done with NAT. I bought it at $26.49.. let it ramp up to $35 and took some profit. During this period the dividend was being discussed as to what it might be reduced to.

It was a little over $1.30 per share. The verdict came back that they were going to cut back to $.83. That is about a 36% drop in dividend. Where their percentage drop originated is some ritious computations but still $.83 (right now) is not too shabby. I have some under $10's that have that same or a bit more payout too. Doing my homework is paying me well.

I have a tight stop at $30.25 on NAT. With the price of oil so volatile that crude sitting offshore in NAT vessels has the potential to offset any future adjustments. I may not see that $30 stop for a week or so. Not worried with the stop in place unless it freefalls and the stop cannot keep up with the falling knife. Do not see that happening.

We all know that when any stock pays out the dividend, the price drops commiserate the yield that very day to offset the pay out. NAT will likely drop for that. It becomes- another trigger point to grab some more- a stock to capture or at least keep a close watch on.

Jan 18 04:53 PM

[longoil:]

I disagree with the conclusion of this article.

Take PWE for example. It has dropped in value by 60% over the last year.
But it has a dividend yield of 28%, a price-to-book ratio of 0.6 and price-to-earnings 4.5.

Since when is a company with these statistics a bad company to invest in ???? I take PWE over most companies out there anyday.
>>>A 28% dividend while I am waiting for a nice capital gain when oil prices recover.

Jan 21 03:54 PM

[jutsu:]

Yeah the author here doesn't seem to make much compelling statements. I was searching the net for some similar articles and found another guy's site that talks a bit about the same issue but makes a bit more sense.

investmentblog.wordpre.../

I totally agree with longoil, since when is a company with good stats bad just because its giving a 28% dividend?

Jan 25 11:53 PM

[jfr1107:]

I feel the same about HTE. I had been reading financial news articles on HTE and the reporters lumped HTE into the E&P group of companies only. HTE has a very profitable global customer refinery operation but none of its earnings which are extremely good are mentioned. That is why I think HTE is not going to get caught up in cutting its dividend like the E&P companies had to do when the bottom fell out of the price of a bbl of oil. For every bbl of oil three (maybe 4) 42 gallons of distilled hydrocarbon expectorants are produced. Subtracting the cost of a bbl of oil, the remainder is a profit of anywhere from $12 to $18 per bbl of hydrocarbons that were refined. HTE has been hammered only through disinformation.


On Jan 21 03:54 PM longoil wrote:

> I disagree with the conclusion of this article.
>
> Take PWE for example. It has dropped in value by 60% over the last
> year.
> But it has a dividend yield of 28%, a price-to-book ratio of 0.6
> and price-to-earnings 4.5.
>
> Since when is a company with these statistics a bad company to invest
> in ???? I take PWE over most companies out there anyday.

Feb 19 07:55 PM