Dividends are a critical part of an investor's annualized returns. High dividend yield stocks have a strong history of outperforming the S&P 500. This happens usually because a high dividend yield arises from a mature, highly profitable company that is able to pay out earnings to shareholders.
However, this is not always the case. High yields may also be caused by the decline in stock price of a distressed company or the collapse of economic fundamentals within its industry. Exemplified by the dividend reduction and crash of World Wrestling Entertainment (WWE) in the past month, some stocks of fundamentally weak companies have deceptively high dividends that can lure an investor who does not do his or her homework.
Below I have listed four companies that pay out dividends higher than their earnings per share and/or are at risk of dividend cuts. Dividend cuts usually also coincide with a decrease in stock price and earnings, so watch out, or consider shorting these stocks before buying them.
Blue Square Israel Ltd. (BSI) - Blue Square is a grocery store chain in Israel that resembles Wal-Mart (WMT) by virtue of also selling housewares. Last year the stock paid out a $3.41 (35% yield) dividend while the company only earned 41 cents per share. This payout was debt financed to attract investors and the company is unlikely to offer a similar yield in the future. With earnings declining the past five years and its location in a geopolitically unstable region (Israel may be relatively safe, but investors' perception is what matters), I recommend staying away from this stock.
The McClatchy Company (MNI) - The McClatchy Company is the third largest newspaper company in the United States and pays out a 12.39% dividend yield. However, the newspaper industry has been dying since the advent of the internet as advertisement revenue has plummeted over the past ten years. Also, most of its newspapers are in small markets (the McClatchy paper with the largest media market is the Miami Herald), and like its competitors, MNI has largely failed to combat the effects of the internet on journalism. Earnings are down 42% over the past year alone and if the payout ratio holds, the dividend will decline with it shortly.
Horizon Lines Inc (HRZ) - Horizon Lines is a shipping and logistics company that provides shipping services from the continental United States to Hawaii, Alaska, Guam, Puerto Rico, and Micronesia. It pays an 11% dividend yield despite losing more money per share than the company is currently worth (-2.19 EPS vs. $1.82 share price). The debt load for the company is astronomical with a debt to equity ratio of 85.03. The company will most likely not be able to pay this back and may fall into bankruptcy or at least cut the dividend.
Pitney Bowes (PBI) Unlike some of the other stocks mentioned, Pitney Bowes has a growing dividend that is lower than its earnings. However, the company suffers from the buggywhip syndrome. The widespread use of e-mail and the ability to print stamps directly from one's computer have eliminated the use of many of PBI's services. The dividend growth rate also has considerably slowed down since 2000. Earnings are down 27% this year and are expected to decline by at least 4% per year the next five years. This may jeopardize Pitney Bowes' ability to pay out its dividend in the future.
Other companies with dividend amounts significantly higher than earnings per share: