Reasons To Be Wary Of High Yielders

Includes: NOK, WIN, WWE
by: Tradevestor

Seeking Alpha and the investing community in general has lots of dividend lovers and it is easy to understand why. Dividends show you tangible progress in your investments right from the beginning. Do you still remember the very first dividend check/deposit in your account ? We surely do. But if investing was all about just dividends, it would be so easy.

Investors (shout out to the newbies) have to be careful about "junk" high yielders - stocks that do not have the cash flow or the business fundamentals or the earnings to maintain their dividends. Since Seeking Alpha's dividend community (including our family) seems to the largest and yet the fastest growing, this article presents a few high yielding stocks and (as unique as possible) reasons to be wary of them. Of course there are going to be many more such stocks than the ones listed here but we hope the reasons presented here will help you in your own analysis of such stocks.

Nokia (NYSE:NOK):

  • Current Yield: Due to the beaten down stock price, Nokia yields well over 6% right now
  • Why It Is Dangerous: Nokia has so far been beaten fair and square by competitors like Apple (NASDAQ:AAPL) in the smartphone market. While there are some products in the pipeline, it is very hard to imagine Nokia turning it around to once again become the great force it once was. The company has been bleeding money and just one look at this page would turn away any fundamental analyst. While talks of a buy out or selling patents are getting noisier, they are just that now. Talks. Nokia is a classic example of being beaten down by direct competitors.

World Wrestling Entertainment (NYSE:WWE):

  • Current Yield: As with Nokia, a plummeting stock price has put WWE's current yield north of 6%
  • Why It Is Dangerous: To start with, the company has a history of "body-slamming" its dividends. The payout ratio currently exceeds 100% and this becomes a bigger concern due to decreasing earnings per share, though the company is almost debt free. The creative team has been under tremendous pressure to come up with interesting plots and the pay-per view buy rate has been plagued due to boring story lines. The company's desperation is very evident in its over reliance on past performers, instead of grooming the younger stars. Hey, WWE - what got you here won't get you there. WWE, unlike Nokia, does not have many major direct competitors. This is a classic example of a company defeating itself because of its complacency.

Windstream Corporation (NASDAQ:WIN):

  • Current Yield: WIN currently carries a double digit yield, a glaring red flag unless you are talking about REITs or MLPs.
  • Why It Is Dangerous: WIN's long term debt has risen sharply over the last couple of years as shown in the chart below. A payout ratio of almost 300% sounds scary, even though WIN has been paying a steady 25 cents/share dividend since 2006. The debt-to-equity ration exceeds 6%. To borrow Motley Fool's terminology, WIN appears to be a dividend blowup than a dividend dynamo. This is an example of a debt-ridden company that could slash its dividend when it can no longer take in any more debt.


Disclosure: I am long AAPL.

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