Remember the old poker axiom—if you don’t know who the sucker at the table is, it’s you.
In this low-interest rate environment, investors are so desperate for more income, they are chasing high yields and riskier yields.
It’s all about yield. High yield – but not too high.
Investors see mouth-watering yields of 12%, 14% or even 16% advertised by investment firms and they buy, buy, and buy more. But once yields start inching above 12% (or 14% in some exceptional cases) it usually means there’s something wrong with earnings or the company itself.
The research departments of investment firms are cranking out new and complicated “high-yield” income investment products faster than any normal investor can keep up with them. They’re out to profit from the Baby Boomer generation, and have launched a full frontal attack on the market to get your dollars.
Some of these new investments are highly profitable to you, the investor. But all of them are profitable to the Wall Street firms that sell them. Believe me when I tell you – you’re the one who takes on risk, not them.
Companies that investors are buying today that are being set-up for a big dividend cut in the future or a substantial loss of capital.
Here are 5 high yield sucker plays that you should avoid in your chase for income.
Frontier Communications (NYSE:FTR)
A 9.9% juicy yield is impressive until you consider that a 325% pay-out ratio means the company is paying out 3 times as much dividends as it brings in earnings. Sounds like a recipe for success or does that sound like a company trying to “buy off” its shareholders so they don’t bail out on the company? If it sounds like a yield trap, you’d be correct and with a stock price that has fallen from $16 a share to $4.50 per share that 10% yield isn’t going to do you much good when your capital gets whacked by 70%.
Globus Maritime Limited (NASDAQ:GLBS)
Another popular sector among “yield chasers” are the dry bulk shipping companies and GLBS is no exception. This shipper pays a stunning 16.3% dividend, but the stock price has tanked 63% in the last year and suspended its dividend payments in November 2013. Combine that with a 270% payout ratio, and you should run, not walk away from this one.
American Capital Agency (NASDAQ:AGNC)
The rising star of income investors is the increasingly popular REIT, American Capital Agency, with a 10.5 billion-market cap and a dazzling 15.8% yield. But, when you consider the CEO comes from parent company, American Capital Ltd. (ACAS), where in the melt down of 2007 – 2008, he led ACAS’s stock price from a high of $35 down to $.59. Don’t wait around to see how his “second act” plays out…sell this one now.
Portugal Telecom, SGPS S.A. (NYSE:PT)
From the outside, this Portuguese telecom company looks like a typical monopolistic utility that sports a respectable 12.60% dividend (but did I mention that it is located in Portugal?). PT operates in a depressed economy, their earnings are in decline, the stock price has gone nowhere and their payout ratio of 156% and climbing is very troublesome, so don’t go into this “pig pen”. If you own it, time to dump it and look to safer shores.
Sandridge Mississippian Trust II (NYSE:SDR)
We like oil and gas trusts, but not they are not all created equal. SDR controls a number of very desirable oil and gas leases and pays a whopping 14.40% dividend, but a weak management team, lacking vision and a messed up business model, has left this yield play’s price in a steady 40% decline over the last year. There are better energy trusts and partnerships out there where you can find stable high yields without taking on SDR’s risk.