Current Dividend Myths

Now that the stock market has declined 25-40% this year, investors who have decided to be greedy when others are fearful are now dipping their toes back in the market. A good strategy has also become in vogue - dividend yield hunting. Though I think this is a good strategy to seek "boring" stocks - meaning not stocks participating in bull markets - the market downturn has caused and effective 33% to over 50% increase in yield distributions.

This is a great opportunity, as Cramer is now directing people to consider the dividend yield as a sign of stability AND security since his show started. However, what must be considered is not just the new yield percentage, but critically evaluate the reason why the dividend has doubled. Well, superficially the dividend doubles when the price of the stock gets cut in half, but what is the underlying reason it was cut in half is the $1mil question.

For example - many REITs now boast astronomical yields, big banks dominated the DVY (Dividend Index), and energy trusts have had their dividends skyrocket. Yet, a cursory look at these tells us a lot. First - remember a dividend is a distribution of cash to investors and admission that the company is currently taking full advantage of its place in the marketplace, needs no more money to pursue growth and thus is finally giving you the earnings per share you've paid for when you bought it.

Now, the issue arises when the company has crested. If the earnings are set to fall, the free cash flow will fall and the investment community will bid the stock down commensurately. This means - they give you a dividend and subtract it from the price of the stock. Imagine you owned a stock for $10 with a quarterly dividend of $1 and declining earnings per share. This stock will pay you $1 and decline by almost the same amount. Just as with growth stocks - you can get caught in this value trap in reverse.

So, the real key is to find stocks which raised their dividends during the heyday, might have a little short term earnings blip which as pushed them heavily downward. However - the key here is the "blip". If the earnings are expected to recover with the economy - then seize it. but beware companies that paid high dividends based on business models which might be left by the business roadside coming out of this credit crunch. Some most notable companies with high dividends are listed below. Some have shaky outlooks, others like in the oil patch - probably will recover and generate enough cash to pay you until they do.

Canadian Oil Trusts: PGH,PWE,PVX
Big Oil Companies: BP,TOT
Oil Pipelines: TCLP,BPT

Mortgage REITS: NLY,AGNC
PE Stocks: ACAS,MCGC

Big Oil Stocks: BP,TOT

Banks: BAC,C

Ok - so draw your own conclusions on these, but clearly bank stocks are in flux - who knows what their future earnings could be. Big oil - oil has come down, but do you really think it will stay here long, especially when the economy recovers? Canadian Trusts have the tax situation coming up and their exposed to market risk of prices of energy, but otherwise they're living in quiet Canada and have established business models you can understand. Pipelines have contract risk if prices of oil/gas stay low, but their cashflow is huge and their liabilities outside energy or expansion is low. You decide which dividend is safest in 2 years and go after that.

Cheers.