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  • 22 Companies with Dividends on Death Row [View article]
    As the chart shows, many companies that were considered solid dividend payers a year ago are now teetering on insolvency. Those 5-10% dividend payments have been no match for the double-digit capital losses that investors endured. Many of these companies have been taking on debt at 8-15% interest rates just to send that cash to shareholders. Now those shareholders are just shocked that the value of their company, and its ability to continue paying dividends, has declined.

    Constructe, you're right, that does resemble Bernie Madoff!

    Before we chase ANY dividend, we should ask whether the 100% safe rate of return we can earn on that dividend is less than or equal to the average interest rate the company pays on its debt. If the interest rate on the company's debt is higher than the interest you can earn with similar 100% certainty, then the company is paying you at the expense of your own equity. That is, if your company borrows at 8% to pay you a dividend that you earn 3% on (at a similar level of safety), you've destroyed value for yourself.

    You might as well take out a personal bank loan at that rate and hold the money in a lower-interest account. It's the exact same principle.
    Feb 18 15:07 pm |Rating: +2 -1 |Link to Comment
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