Published:
September 29, 2009
On July 1st, Standard and Poor's
issued the following in a
press release:
"Dividend decreases were posted
by 250 issues during the second
quarter of 2009, the highest number
since the second quarter of 1957,
over 50 years ago."
According to Howard Silverblatt, a
senior analyst at S&P, annual
dividend increases have outnumbered
decreases for as far back as S&P
records go -- 1955. But that streak
looks like it will end this year.
"It's not a good time for dividend
investors," according to Silverblatt.
Judging from this report, you might
think income investing is a lost
cause. You couldn't be further from
the truth.
For example, the portfolios in my
premium
High-Yield Investing newsletter
have rarely seen better days. I
informed readers a
few weeks ago that every single
one of my current holdings was
showing a gain. As of my latest
update I did have one pick in the
red -- it was down -0.3%. Moreover,
my holdings yield as high as 12.9%.
And only two of the 23 positions
yield less than 6%.
So you can see it's possible to make
this environment a great time for
income investing, but now -- more
than ever -- you have to focus on
dividend safety. The question is,
with so many stocks cutting
payments, how can you get any sense
for the safety of the dividend?
Two Tricks to Find Safety
The first trick I use is an old
standby of income investors -- the
payout ratio -- but with a twist.
The payout ratio is simple. Take how
much the company earns and divide it
by how much it pays in dividends. If
a stock earns $1 per share and pays
$0.50, it has a payout ratio of 50%.
Ratios below 80% are generally
considered "safe."
But sometimes you have to be a
little more sophisticated with
payout ratios. Some securities carry
unreasonably high ratios if earnings
alone are compared to dividends
paid. But in the case of shippers or
telecoms -- or any company that
encounters high depreciation
expenses -- a more accurate payout
ratio comes from comparing operating
cash flow to dividends paid.
This figure can be found on the
company's cash flow statement and
backs out non-cash charges like
depreciation. Depreciation expenses
lower earnings for a company, but
don't actually affect the cash
available for dividends. By
accounting for this nuance,
investors can have a better sense of
the dividend's safety.
Income Required by Law
The second technique I'm using to
prosper is focusing on securities
required to make payments to
investors.
Believe it or not, the dividends
from common stocks are the least
secure of any income investment.
These payments are made solely at
the discretion of company
management. When business goes
south, cutting the common dividend
is usually the first move made to
save cash.
But there are dozens of securities
that offer guarantees of payment.
For example, real estate investment
trusts (REITs) and master limited
partnerships (MLPs) are required by
law to pass on a bulk of their
income to investors.
But one of my favorite legally
obligated income streams comes from
trust preferred shares. These
beauties have many of the same
characteristics of bonds, but they
trade on the NYSE just like a common
stock, making them easy to buy and
sell.
As for safety, they can be
second-to-none. I picked up shares
of Wells Fargo 8.625% Trust
Preferreds (NYSE: WCO) in
January. These notes are backed by
Wells Fargo, which carries a credit
rating of "A3" from Moody's and "A"
from Standard & Poor's -- indicating
little risk of default.
At the height of the financial
crisis Wells Fargo had to cut its
common dividend by more than -85% to
save cash. But the trust preferred
shares have kept making their steady
payments of $0.54 per share every
quarter (for a current yield of
8.1%) ... and have even risen in
price to above their par value. In
fact, since adding WCO to my
High-Yield Investing portfolio,
I've gained nearly +20% and don't
have to worry about my income stream
being crimped.
It just goes to show that by keeping
a close eye on safety, right now can
still be a great time to be an
income investor.Good investing!
Carla Pasternak
Editor
High-Yield
Investing
About High-Yield Investing
High-Yield Investing is
a monthly investment newsletter that brings you a wealth of information on the
market's leading income stocks and funds, as well as a host of relatively
unknown investment options that you probably won't find coverage of anywhere
else. Many
of these securities provide investors with annual dividend yields of 10%, 15%,
even 20% or more. The newsletter not only provides subscribers with
investing ideas that produce incredibly high dividend yields, but the kicker is
that these high-yield investments have also consistently outperformed the major
market averages. (Learn
More)
About Carla Pasternak
Editor of StreetAuthority.com's High-Yield Investing newsletter since its
inception in May 2004, Carla Pasternak draws on a variety of financial
backgrounds to make profitable calls on income-generating stocks for her
readers.
Carla has been employed in the investment industry for more than two decades.
In addition to her work as a writer for several nationally recognized financial
publishers, her previous experience includes a position as president of a
well-respected investor relations firm. She has also been writing shareholder
reports for public companies since 1980.
A highly successful investment analyst, Carla specializes in high-yield,
income-paying stocks. In that pursuit, she's always mindful to select companies
that not only pay rich dividends, but that also deliver strong long-term capital
gains. Furthermore, Carla's experience in writing SEC filings gives her the
added insight required for her to truly understand a company's current and
future financial health.
On the educational front, Carla holds BA, MA, MBA and Ph.D. degrees. When
she's not watching the market, she's teaching business courses at the college
level and managing millions of dollars in portfolio assets.
To learn more about Carla Pasternak's premium income investing newsletter -- High-Yield
Investing -- please visit
this link.
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