by Dan Burrows | September 28, 2012 12:53 pm
Troubled mobile device maker Nokia (NYSE:NOK) is burning through cash, and very well might have to suspend its dividend for the first time in decades.
Let that be a warning to dividend investors: Unusually high yields are usually too good to last.
Nokia currently yields nearly 10% — but that’s less a reflection of generous payouts than it is the fact that shares have lost more than half their value in the past year. As with bonds, a dividend-paying stock’s yield goes up as its price falls.
Dividends are supposed to provide some kind of floor on the share price — the idea being that as the stock falls, the yield becomes so attractive that equity income investors step in.
But when that stream of payouts is in doubt, all bets are off. And Nokia has made no secret of the fact that it’s willing to halt its dividend to conserve cash if it’s still “in transition” next year.
CEO Stephen Elop cautioned investors back in July that the board would take a “conservative view” on the dividend as it fights for its life against Apple‘s (NASDAQ:AAPL) iPhone and smartphones running Google‘s (NASDAQ:GOOG) Android operating system.
Translation: If the upcoming holiday launch of Nokia’s Lumia smartphones powered by Microsoft‘s (NASDAQ:MSFT) new OS tanks, don’t bet on the board of directors approving the 2013 payout when it meets in January.
Nokia, racking up losses, is burning through $300 million a month, and analysts and investors are increasingly skeptical that it will maintain payouts, Bloomberg reports.
That’s why the big institutional money isn’t stepping in to grab that juicy, nearly double-digit yield. There’s too great a risk that they will never see the cash.
No company cuts or suspends its dividend lightly. Funds are counting on those payouts; they factor them into expected total return. Eliminating the dividend is a great way to alienate your equity income shareholder base.
Furthermore, it signals to the market that precious cash — the lifeblood of daily operations — is scarce. True, shareholders get wiped out in a bankruptcy, so suspending payouts is certainly preferable to that — but then, why would any conservative, equity income investors stick around when faced with such risks?
Bonds, savings accounts and certificates of deposit pay almost nothing (or less than nothing once you subtract inflation). Meanwhile, the stock market is yielding more than 2%, while benchmark 10-year Treasury notes haven’t decisively held above that level for more than a year.
No wonder folks are piling into dividend-paying stocks, and that’s all well and good. But be smart about it. The key is to find reliable dividend payers — ones that have a long history of not just maintaining, but raising, dividends.
For individual names, a great place to start is InvestorPlace’s list of Dependable Dividend Stocks. These dividend stocks are are rock-solid when it comes to preserving capital and making regular, increasing payouts.
Bottom line: When it comes to dividend stocks, you can never go by yield alone. As with everything else in this life, if it looks too good to be true, it probably is.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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