Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

3 Dividend Traps Tempting Investors With 8%-10.5% Yields

By Contrarian Outlook (Brett Owens)Stock MarketsOct 16, 2020 05:09AM ET
www.investing.com/analysis/3-dividend-traps-tempting-investors-with-8105-yields-200541288
3 Dividend Traps Tempting Investors With 8%-10.5% Yields
By Contrarian Outlook (Brett Owens)   |  Oct 16, 2020 05:09AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

We can’t take every dividend we see at face value. Especially when we’re talking about 8%, 9% and even 10% yields.

Bull markets, government stimulus, money printing and the scent of all-time highs might give the impression that any stock is safe. Unfortunately that isn’t the case. Even in a bull market, there are dividend traps paying 8% to 10% that’ll sink despite the broader rising tide.

The market might have taken a deep breather earlier this spring, but multiple expansion hardly slept a wink. Thanks to battered earnings, the S&P 500 has only gotten more expensive as the year has rolled on.

This Is The Third-Priciest Market In History

PE-Ratio-Chart
PE-Ratio-Chart

We’re not being rewarded for our risk, either. This year’s broad dividend cuts, combined with higher prices from the recent rally, are resulting in one of the lowest market yields in years.

And Historically, We’re In A Dividend Drought

Yield-Chart-Long-Term
Yield-Chart-Long-Term

In this kind of environment, even a fairly priced stock with a so-so yield will get a quick glance from income-starved investors. Downright cheap stocks with high yields will attract income hunters like a moth to a lamp.

But we don’t want cheap stocks. We want bargains.

So, how can we tell the difference?

Consider Ford (NYSE:F), which for years kept offering increasingly tasty yields, but primarily because its price was in long-term decline.

This Dividend Cut Didn’t Take Everyone By Surprise

Ford-Price-Dividend-Yield-Chart
Ford-Price-Dividend-Yield-Chart

But while Ford traded at perpetually low forward P/E multiples, and while its stock price kept getting cheaper, it never really became a bargain.

That’s because anyone who followed the business kept getting more and more bearish on its prospects. The U.S. passed peak “peak auto” years ago. Automakers have been scrambling to figure out what Millennials want, and determine the right amount of EV demand. Ford all but exited the sedan market in 2018 to focus on higher-margin SUVs and trucks.

Cheap. But Not A bargain.

To show you what I mean, I’m going to pick on three losers paying juicy yields of up to 10.5%. We want to avoid those yields, which are likely going to get even higher over time. Then, we’ll discuss some more dependable high-yield dividend payers for you to consider instead.

Macerich

Dividend Yield: 8.0%

Macerich (NYSE:MAC) is a mall real estate investment trust (REIT). I know, sounds dicey already. Malls?

Now, Macerich—which boasts 47 properties from coast to coast—will tell you that it’s “the premier, pure-play, high-end mall REIT” with “trophy properties” located “in top U.S. markets.”

But at the end of the day, it’s a mall REIT. And in the age of digital commerce, that means a large yield in Macerich should always be viewed with a skeptical eye.

In fact, less than a year ago, I told readers:

“This double-digit yield probably won’t last long. It is living quarter-to-quarter as tenants (and the rents they pay this REIT, or real estate investment trust) are being bombarded by free shipping courtesy of Bezos & Co.”

The coronavirus certainly sped up my prediction, but sure enough, months of closures forced Macerich, whose shares are off 73% year-to-date, to hack its dividend from 75 cents per share to a dime for the June payment. (To its credit, it has since raised it by a nickel, to 15 cents, for September.)

But Macerich’s Yield Has Remained High Thanks To Plunging Prices

MAC Price Dividend Chart
MAC Price Dividend Chart

But it’s not a pretty picture from here.

Macerich has a total of $8.7 billion in debt between its own IOUs and joint-venture debt. More troubling is this, from its latest quarterly report:

“Given the continued disruption and uncertainties from COVID-19 and the impact on the capital markets, the Company does not anticipate it will be able to refinance its near-term maturing mortgages.”

It goes on to say that it will try to secure short-term extensions of near-term maturing non-recourse mortgage loans on several of its malls, “although there can be no guarantees the Company will be successful in obtaining these extensions.”

In short, Macerich more than has its hands full with debt, and the pandemic is far from over. Sure, the REIT is getting the final three of its 47 malls re-opened. But winter is coming, and Americans, fearing a “second wave” of COVID, are likely to continue the online shopping habits they’ve so quickly adopted.

MAC is going nowhere fast.

Franklin Street Properties

Dividend Yield: 9.0%

Office REITs are in a not-so-dire but still-similar situation.

Prior to COVID, offices weren’t facing an existential threat on the same level as the one e-commerce presented to brick-and-mortar retail. But telecommuting was making inroads. Consider that a survey from flexible workspace provider IWG showed that 74% of respondents called flexible working “the new normal.”

That survey came out in March … of 2019.

And while many workplaces are trying to bring employees back into the office and will do so with more gusto whenever COVID is brought under control, it’s clear that 1.) telecommuting can work on a large scale, and 2.) employees like it. This has many experts predicting the future of work will include much more flexible schedules with less in-person time, necessitating less office space, and some suggest smaller “satellite offices” could replace large centralized offices in some instances.

This all bodes poorly for the likes of Franklin Street Properties (NYSE:FSP), which has 32 operating properties and three redevelopment properties in 10 states, mostly in the Midwest and the Southeast.

This Wasn’t A Promising Trend Before COVID

FSP-Price FFO Chart
FSP-Price FFO Chart

FSP earned $428,000 in net income during the first six months of 2019; in 2020, that flipped to a $3.1 million loss. But remember, Franklin Street is a REIT, so we’re more concerned with funds from operations (FFO) when evaluating its profitability. On that front, $3.3 million in AFFO for the first six months of this year doesn’t look bad… but that’s a third of what it recorded during the same period in 2019.

Franklin Street hasn’t cut its dividend, and in fact recently confirmed another 9-cent quarterly payout due in November. But it’s biting off more than it can chew—AFFO was just 3 cents per share for the first six months of the year. And actually, 2019’s first-half AFFO of 9 cents per share was half of what it paid out in dividends.

That shoddy dividend coverage and a questionable future for its core business are enough reason to leave this 9% dividend be.

Delek US Holdings

Dividend Yield: 10.5%

Delek US (NYSE:DK) is a relatively young downstream energy company that got its start roughly two decades ago. The company boasts refinery operations and retail locations in the South and Southwest.

However, it also has an 80% ownership stake in Delek Logistics Partners (NYSE:DKL), a logistics division that involves gathering, transporting and storing crude oil and refined products. Delek also boasts asphalt technology and materials operations, as well as biodiesel plants.

Delek’s 2020 story is much like other stocks in the energy sector. COVID’s incredible drag on commodity prices squashed its bottom line: The company lost $314.4 million during the first quarter, then $110.5 million in Q2. Shares naturally tanked along the way.

The Bottom Falls Out Of Delek

DK-Price EPS Chart
DK-Price EPS Chart

The company also is sitting on long-term debt of $2.4 billion that has grown uninterrupted for years and is more than triple 2015 levels; Delek Logistics is also saddled with roughly another billion dollars in debt.

If there’s a bright point, it’s that Delek hasn’t yet had to cut dividends, though it did cut short a six-quarter streak of payout hikes by maintaining its payout level for June. In normal conditions, Delek’s dividend is easily sustainable.

But these aren’t normal conditions, and the light at the end of the tunnel is merely theoretical. At some point, in the nebulous future, demand might return, when and if there’s a vaccine. In the meanwhile, analysts covering the stock are warning about tight refining margins and even the possibility that Delek will have to close more refineries, leading them to cut already dim estimates.

Disclosure: Brett Owens and Michael Foster are contrarian income investors who look for undervalued stocks/funds across the U.S. markets. Click here to learn how to profit from their strategies in the latest report, "7 Great Dividend Growth Stocks for a Secure Retirement."

3 Dividend Traps Tempting Investors With 8%-10.5% Yields
 

Related Articles

3 Dividend Traps Tempting Investors With 8%-10.5% Yields

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email