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 (CBK), suspended its dividend last month so it doesn't have a current yield.
For comparison purposes, I've also added the cost of hedging the iShares iBoxx High Yield Corporate Bond ETF (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.
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|| |
|Veolia Environment |
|DHT Holdings, Inc.||DHT||15.2%||No Optimal Contracts|
|Ship Finance |
|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
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in CBK over the next 72 hours.