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If you look through the high yielding stocks that are pulled up by stock screeners, you will notice that there are some outrageously high yields out there, one as high as 45%; but are they genuine high yields?

You will also find that different screeners come up with different results. I discovered that when doing this screening, one of the stocks in my portfolio supposedly pays 37%. I didn't even know it paid a dividend! So let's look at the top ten yielding stocks [all of which supposedly pay over 25% yields] to see why the yield is showing up at such a high level:

Royce Focus Trust, Inc. (FUND): 45.5% This is a closed end investment company that invests in stocks and bonds of various sector companies. They pay their dividend quarterly and if you take the last four dividend payments, they add up to $1.57. If you divide that by the closing price of 10.80, you get a yield of 14.5%, still high yet far below the 45.5% the screener pulled up. The only way I could get close to the higher yield was to extrapolate out just the last payment made of $1.20 and multiply it by four to give an annual payment of $4.80.

Unfortunately, you can't do that because the payments for the first three quarters of last year were 12 cents, 12 cents, and 13 cents, and it's probable that the next three quarters will be around that lower amount. The dividend history shows that the first three quarters are always lower than the last quarterly payment. In addition, 91% of the distributions for last year were capital gains. Therefore, the portion of the distributions that come from ongoing dividends was minimal. You can't rely on the capital gains distributions in the future.

Cal-Bay International Inc. (OTC:CBAY-OLD): 37% This is a company that invests in real estate. They have only made one dividend distribution that I could find, in April of last year. The amount of the distribution was a penny per share. So how does this generate a high yield? The stock trades at an extremely low price of 2.1 cents per share, causing the yield calculation to be so high. Since the company has only paid one dividend, you can't rely on it in the future.

Polyair Inter Pack Inc. (PPK): 37% This is another one-time-only dividend payer. The company makes protective packaging products and swimming pool products. They went ex-dividend in December 2006 at 81 cents per share.

Latin American Discovery Fund Inc.
(LDF): 34.1% This is a closed-end management investment company that invests in Latin American stocks. This company has usually paid a small dividend mid-year and a large dividend at year end. Unfortunately, almost all of the company's year end distribution comes from short and long term capital gains, as opposed to dividend distributions from the stocks in the portfolio. Can't rely upon the same high distributions.

Nicholas-Applegate International & Premium Strategy Fund (NAI): 30.9% Another closed end fund with a year end distribution that includes capital gains.

Frontline Ltd. (FRO): 30.7% This company owns oil tankers which transport crude oil, coal and iron ore. They have been paying dividends since August 2001, with four distributions in 2006, five distributions in 2005, seven distributions in 2004, etc. The dividends have fluctuated all over the place from a high of $5.855 in February of 2006, and the last dividend paid off $2.50 per share. The dividends are reliant upon the company's ability to command the high fees that have been charged for transporting oil.

Templeton Emerging Markets Fund (EMF): 30.4% Yet another closed end fund with a year end distribution that includes capital gains.

Novastar Financial Inc.
(NFI): 26% This mortgage company specializes in residential nonconforming loans. They have paid dividends four times a year for several years. In 2006, they paid out $5.60 per share in dividends, yet their diluted earnings per share were only $3.24. How much longer can they keep up these dividends at this level?

New Century Financial Corp. (NEW): 25.8% A mortgage real estate investment trust that has been paying dividends at least four times a year for the past several years, and dividends have increased with every payment since July 2004. In the last year, they paid out $7.30 per share. Diluted earnings per share were $6.72. How much longer can they keep this up?

American Israeli Paper Mills Ltd.
(AIP): 25.4% This manufacturer of paper products in Israel has paid dividends sporadically since 1997, with a couple of years being skipped. Dividends have fluctuated from a low of $.685 per share to a high of $9.21 per share. Because of the substantial fluctuations of the dividends in the past, future dividends cannot be predicted.

Rules for Investing in Very High Yield Stocks:

1. Check the consistency in the number of payments per year.
2. Check the consistency in the amount of the dividend from quarter to quarter.
3. Check to make sure the dividend payment doesn't include capital gains.
4. Check to make sure the yield isn't generated by a special high year-end distribution.
5. Check to make sure that the dividends don't exceed the stock's earnings per share.
6. And most important, check to make sure that your stock information provider is calculating the correct yield.

Disclosure: Author owns PPK.

Source: The Truth Behind the Top Ten Yielding Stocks