It’s hard not to love high-yielding dividend stocks. After all, if you’re getting, say, 9% back in cash every year, you’re already ahead of the market without a cent of share appreciation.
Many investors need that sort of yield from stocks to maintain their lifestyles. Years of zero interest rate policies have taken their tolls on traditional fixed-income portfolios, so sometimes, seeking out high yield is the only way to keep the golf rounds running — or in tighter situations, just keeping the electric turned on.
However, there’s a difference between stocks that pay a high yield because they’re designed to and can afford it, and those whose yields are actually a signal of murky water — after all, high yield often equates to high risk.
Knowing the difference between a “good” high yield and a “bad” one can save you from losses and headaches down the road. So today, we’re looking at six more popular high-yield dividend stocks that investors might be better off avoiding altogether.
High-Yielding Dividend Stocks to Avoid: Frontier Communications Corp (FTR)
FTR Dividend Yield: 8.5%
When it comes to high-yield dividend stocks, telecoms are often a happy hunting ground. And Frontier Communications (FTR) offers a very happy payout of more than 8%.
Well, leave it alone. FTR could trigger more sadness than anything else.
FTR specializes in servicing rural communities across America. Originally offering only traditional wireline phone service, Frontier has expanded into offering DSL and broadband internet services to these areas. The problem, of course, is that the wireline business is basically dying — even in the sticks — and demand for phones is dropping as better quality cell coverage is available.
That’s why FTR’s move to continuously buy wireline assets from Verizon (VZ) quite peculiar. After spending $8.6 billion back in 2009 for wireline assets, Frontier made another $10 billion move this year. Sure, the deals add plenty of “current” customers to its base — but it also does so by piling plenty of debt to FTR’s balance sheet. Frontier issued a $6.6 billion junk bond to pay for the latest buy, and the firm’s total long term debt rose to more than $16.1 billion.
That’s pretty darn high.
Meanwhile, FTR has cut its dividend twice since 2010 — from 25 cents to 18.8 cents, then again to 10 cents — before finally issuing a slight uptick this year, to 10.5 cents.
A long way of saying that 8.5% yield doesn’t feel like the most secure blanket in the long term.
High-Yielding Dividend Stocks to Avoid: EV Energy Partners, L.P. (EVEP)
EVEP Dividend Yield: 63%
Master limited partnerships have been the dividend vehicles du jour for many, many jours. The tax structure allows for some hefty distributions to sponsoring firms and investors — the key is in the cash flows from the assets placed within the MLP.
But that’s a problem for EV Energy Partners, L.P. (EVEP) and its massive 63% high yield.
EVEP is an upstream MLP, meaning it drills for oil and natural gas. Its cash flows and distribution is directly tied to the underlying price of the commodities … and with prices for these two commodities in the toilet, EVEP isn’t earning what it used to.
Add in high debt, and you have a recipe for disaster.
In its most recent quarter, EV Energy Partners failed to earn the 50 cents per share necessary to keep its rich payout. And EVEP doesn’t exactly hold a ton of excess cash. Management hasn’t officially cut its dividend, but that payment is as good as slashed come 2016.
High-Yielding Dividend Stocks to Avoid: Tronox Ltd (TROX)
TROX Dividend Yield: 19%
Chemicals firm Tronox (TROX) just can’t seem to catch a break. Originally, part of Kerr-McGee before it was spun off, TROX was forced to file bankruptcy as it was stuck with all the litigation and cleanup fees associated with Kerr’s decades worth of polluting.
Today, the issues at TROX are a bit more business cycle-related.
TROX is a major producer of titanium dioxide. TiO2 is used in a variety of products, from paint pigments to potato-chip bag coatings. It’s a commodity chemical, and pricing for it varies wildly as demand ebbs and flows. Unfortunately for Tronox, there’s a huge supply glut of TiO2, and that supply doesn’t seem to be ebbing.
As a result, TROX lost 46 cents per share this quarter and 70 cents per share in the previous one.
Tronox has been working to reduce costs across all its business lines. However, at some point, Tronox’s thick dividend yield is going to be on the chopping block. Debt of $3 billion remains high — that’s about seven times its current market cap.
No wonder why Moody’s recently cut TROX’s debt rating further into junk status and placed it on credit outlook negative.
High-Yielding Dividend Stocks to Avoid: SeaWorld Entertainment Inc (SEAS)
SEAS Dividend Yield: 4.8%
Sometimes the dividend stocks with issues aren’t insanely high-yielding. Take, for instance, SeaWorld Entertainment (SEAS) and its 4.75% dividend yield.
SEAS has really two issues — one was a Blackfish, the other was a Blackstone (BX).
In typical, leveraged buyout fashion, Blackstone loaded up SEAS with debt before spinning the company out to the public (naturally, to extract cash from its investment). Today, that debt sits at just over $1.9 billion. While that’s not terribly huge, the second issue — the film Blackfish — killed attendance at SEAS parks. That’s a problem when you need every ticket dollar to help pay your junk-bond interest. As a result, debt hasn’t dropped since the spinoff.
The additional problem with regards to Blackfish is that to remake its image and expand, SEAS has had to spend a considerable amount of dough.
Poor attendance, high costs and burgeoning debt does not make for a great earnings picture. SEAS is expected to earn 76 cents per share this year — a problem when you’re expected to pay out 84 cents per year in dividends.
With SEAS already having played fast and loose with its dividend payment before, a cut could be coming down the pike.
High-Yielding Dividend Stocks to Avoid: PDL BioPharma Inc (PDLI)
PDLI Dividend Yield: 16.6%
Owning patents can be a very lucrative business model — especially for drug companies. Just ask biotech Valeant Pharmaceuticals (VRX).
Patents also have been a cash cow for PDL BioPharma (PDLI), but the milk could dry up very shortly.
The vast bulk of PDLI’s earnings and cash flows come from a variety of royalties from its proprietary antibody humanization technology. PDLI has licensed this technology to some of the biggest drugmakers, and it’s used in a variety of cancer-related therapies.
That’s the good news. The bad news is that these blockbuster patents are starting to expire.
During its latest earnings report, PDLI saw its earnings tank 32% based on this. And considering that its earnings have been pretty steady — because all it does is clip patent royalties — shares of its stock fell hard. The worry now is that PDL BioPharma won’t have enough cash flows to pay that juicy yield going forward.
That could be correct. While the firm has invested in other patent portfolios, none promise to be as lucrative as its antibody technology.
Ignore this stock.
High-Yielding Dividend Stocks to Avoid: BP Prudhoe Bay Royalty Trust (BPT)
BPT Dividend Yield: 18.4%
Energy royalty trusts have been great dividend stocks for many years, and among the most well-known of these is the BP Prudhoe Bay Royalty Trust (BPT). The trust’s assets are located in the fertile North Slope of Alaska — a monster field that has been steadily pumping oil for decades.
As a royalty trust, BPT gives investors a royalty on certain amount of production coming from the field — in this case, the first 90,000 barrels of daily production.
Unfortunately, there are two things working against BPT:
For starters, there’s the dwindling price of oil. All BPT does is clip cash flows on those barrels. So if oil is down, the trust’s cash flows will be down as well. As such, the lucrative dividends are so lucrative anymore. Dividends have been steadily falling over the last few quarters as oil has cratered.
Secondly, as a royalty trust, BPT can’t add any new assets to its portfolio. This means that it — and all royalty trusts, for that matter — are dying assets. Once the oil’s gone, it’s gone, and the trust will dissolve. That’s fine when times are good and oil is high, but right now, it makes BPT far from worth your time.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.