Seeking Alpha
Portfolio strategy
Profile| Send Message|
( followers)  

Three Reasons to Avoid These High-Yield Names

The stocks in the table below have yields of 10% or higher, but investors may want to avoid them for three reasons:

  • VectorVest gives them "poor" dividend safety rankings - scores of 44 or lower (on a scale from 0-99)
  • VectorVest also gives them "Sell" recommendations
  • Portfolio Armor indicates these stocks have high optimal hedging costs -- as we noted in a recent article ("A Warning Sign That Might Help You Avoid The Next Sears"), high optimal hedging costs can presage poor performance.

I found 6 names that met all of those criteria. The table below shows the trailing yields for them, as well as the costs, as of Thursday's close, of hedging 3 them against greater-than-30% declines over the next several months, using optimal puts (the other 3 were too expensive to hedge using this decline threshold). Note: one of these names, Christopher & Banks Corporation (NYSE:CBK), suspended its dividend last month so it doesn't have a current yield.

A Comparison

For comparison purposes, I've also added the cost of hedging the iShares iBoxx High Yield Corporate Bond ETF (NYSEARCA:HYG) to the table. First, a reminder about what optimal puts are, and an explanation of the 30% decline threshold used here; then, a screen capture showing the optimal puts to hedge one of the stocks listed below, Christopher & Banks Corporation (CBK).

About Optimal Puts

Optimal puts are the ones that will give you the level of protection you want at the lowest possible cost. Portfolio Armor uses an algorithm developed by a finance Ph.D. to sort through and analyze all of the available puts for your position, scanning for the optimal ones.

Decline Thresholds

In this context, "threshold" refers to the maximum decline you are willing to risk in the value of your position in a security. You can enter any percentage you like for a decline threshold when scanning for optimal puts (the higher the percentage though, the greater the chance you will find optimal puts for your position). I have used 30% as a threshold in the table below, but 3 of the stocks were too expensive to hedge using a 30% threshold; i.e., the cost of hedging them against a 30% drop was itself greater than 30% of position value, so Portfolio Armor indicated no optimal contracts were found for them.

The Optimal Puts for CBK

Below is a screen capture showing the optimal put option contract to buy to hedge 100 shares of CBK against a greater-than-30% drop between now and June 15, 2012. A note about these optimal put options and their cost: to be conservative, Portfolio Armor calculated the cost based on the ask price of the optimal puts. In practice an investor can often purchase puts for a lower price, i.e., some price between the bid and the ask.

Hedging Costs as of Thursday's Close

Except for the comparison ETF at the bottom of the table, iShares iBoxx High Yield Corporate Bond (HYG), which has a "good" Dividend Safety rating and is rated a "hold" by VectorVest, the rest of the names in this table have "poor" Dividend Safety ratings and are rated "sell" by VectorVest. The hedging data in the table below is as of Thursday's close, and is presented as percentages of position values. The yield data is also as of Thursday's close. Bear in mind that the yields below are annualized, but the hedging costs below aren't.

Name Symbol

Dividend Yield

Hedging Cost

Veolia Environment

VE 16.2% 24.1%**
DHT Holdings, Inc. DHT 15.2% No Optimal Contracts
Ship Finance

SFL 16.3% 25.3%***
MCG Capital Corporation MCGC 17.0% No Optimal Contracts
Christopher & Banks Corporation CBK 10.3% 27.3%*
Life Partners Holdings, Inc. LPHI 16.1% No Optimal Contracts
iShares iBoxx High Yield Corp. HYG 7.60% 0.45%*

*Based on optimal puts expiring in June

**Based on optimal puts expiring in July

***Based on optimal puts expiring in August

Source: 6 Names With Trailing Yields Over 10% - And 3 Reasons To Avoid Or Short Them