Think Your Dividends Are Safe? Think Again!
The 101 Riskiest
Could put your portfolio at risk of losing
Here’s what to watch out for – and the
Dear Fellow Investor,
The world of dividend stocks has a dark side.
A dirty secret most investors don't know... one that can wipe out half your wealth virtually overnight.
It's a secret many companies – including some blue chips – hope you never discover.
Right now over 100 companies offer yields they can't afford to pay.
They lure investors in with promises of high-yielding income payments…
Hoping no one ever discovers that the attractive yields they’re offering…
Are little more than a house of cards, waiting to collapse.
Sure, they can pull off this scam for a while…
These companies are forced to slash their yields in order to survive.
When that happens – watch out below!
Because the stock price will drop like a rock...
Bleeding off as much as 40% or more in value – virtually overnight.
Right now, hundreds of thousands of investors are being deluded into thinking their income investments are safe, and secure.
When in many instances, nothing could be further from the truth.
However, there is a way to make sure this doesn’t happen in your portfolio…
A way to protect yourself from risk… while securing your account with the best dividends payers in the market.
I’ll show you more about these trustworthy dividends in a moment.
First, I want to let you in on Wall Street’s dirty little secret about dividend paying stocks.
The sad truth is, according to my research,
101 Dividend-Paying Stocks
There are currently 402 companies trading on the S&P 500 that pay dividends.
And I've identified 101 separate dividends that are dicey at best.
That's 1 out of every 4 dividend stocks.
While that leaves 301 reliable companies worth investing in…
It takes a professional eye with years of experience to know how to separate out the wheat from the chaff in the income market.
Which is why I’m writing to you today.
My name is Ian Wyatt.
I'm President and Chief Investment Strategist of Wyatt Investment Research.
Since 2002, I've helped over 450,000 investors build true income portfolios…
By uncovering the best income stocks on the planet.
I've established a solid reputation for knowing which stocks are truly safe and which stocks you should avoid like the plague.
Which is why I'm regularly interviewed by the financial media, including Barron's... Forbes... Kiplinger's... MSN Money... Money Show Digest and other highly respected publications.
Today, I'm issuing my most important investor warning.
It's so critical, I want to ensure it reaches as many investors as possible.
Because as we speak, any one of these 101 Dividend Deceivers could be hiding in your portfolio… like a ticking time bomb just waiting to go off…
Not all dividends are created equal.
Many times, a high yielding dividend is a front – a fancy façade built to hide a crumbling infrastructure.
The high yields of these 101 Dividend Deceivers are often totally unsustainable.
Eventually, these lofty yields come crashing back to earth.
These stocks will have no choice but to slash – or even suspend – their dividends.
It can happen without warning.
But when it does, Wall Street takes immediate notice.
The company comes under intense scrutiny.
Pundits begin questioning every decision made by executives leading up to the cut.
More importantly, investors notice too.
The lucky ones – the ones with the luxury of following the financial news day in and day out – are able to sell and cut their losses before the bleeding gets too bad.
The unlucky ones get caught in the blood-bath caused the dividend cut…
As the stock's value plummets virtually overnight.
I call it a "Yield-Slash Crash"
As you'll see in a moment, when companies slash their dividends attractive yields aren't the only painful losses you suffer.
Their stock prices can also drop 22%... 35%... even 48% or more in a single day. And no matter how big or small your portfolio is...
That's a devastating blow to your wealth.
Even if you unload the toxic stocks, the money you've lost is gone. Along with those dividend checks you counted on. And recouping your losses can take years – even decades.
Here's an example of a Yield-Slash Crash in action...
Boardwalk Pipeline Partners (NYSE: BWP) used to pay a modest 2.13% dividend. But the Master Limited Partnership (MLP) ran into trouble thanks to disappointing fourth-quarter earnings. So on Feb. 7, 2014, BWP slashed its ex-dividend from $0.53 per share down to $0.10 per share.
This alone cost investors 81% of their anticipated profits. And it was just the tip of a titanic iceberg.
Due to the cut, the company suddenly found itself under intense scrutiny. Potential investors questioned whether the stock was safe.
And they weren't alone.
Ratings companies also took a dim view of the dividend slash. Credit Suisse and Moody's each downgraded BWP's rating to "underperform" and "negative" respectively.
As you can see above, BWP's stock price fell from $25 to $13 in a single trading day – compounding its investors' pain with a 48% capital loss!
Of course, you could argue BWP's investors were playing with fire. That you can avoid the Yield-Slash Crash effect by investing in bigger, more mature companies.
But don't be fooled...
Blue Chip stocks are
Investors holding America's third-largest telecom company, CenturyLink (NYSE: CTL), were also savaged by a Yield-Slash Crash.
On Feb. 13, 2013 the $22 billion mega-cap slashed its dividend more than 25%, from $0.725 per share to $0.54 per share.
CTL wanted better cash allocation so it could repay debt and finance a stock buyback initiative. However, Wall Street didn't care whether or not the company's reasons were sound.
In a single day, shares of CTL fell 22.5%, from $41.69 to $32.27. And even after 16 months, the stock still hasn't fully recovered!
Walter Energy Inc. (NYSE: WLT) is a leading producer of metallurgical coal, which is used predominately to fuel steel production. And to the untrained eye, the stock looked extremely promising.
Between January 4, 2010 and January 3, 2011 shares of WLT surged from $81.17 to $133.34 in 2010 – a hefty 64% increase. But what many investors didn't realize is the company was standing on shaky ground.
In 2010 and 2011 Walter pursued an aggressive expansion strategy. Property and plant expenses ballooned 341%, from $1.2 billion to $5.3 billion.
It funded this massive growth by increasing shares outstanding 13.3%, from 53.2 million to 60.3 million.
However, the company's debt should have been its main concern.
Within a single year, Walter's long-term debt exploded nearly 1,384% – from $155 million to $2.3 billion. Debt had previously been a small and manageable fraction of WLT's capital structure. But it now exceeded the company's equity value.
It was a disaster in the making.
The company found itself hammered mercilessly by a perfect storm when steel prices contracted and metallurgical coal prices tanked.
From July 18, 2011 to August 1, 2011 the stock fell from $131.71 to $73.30 – a sharp 44.3% loss in just two weeks.
And the company continued to hemorrhage money. By late 2012, share prices of BLT traded in the mid-$30s. But even though share prices had fallen nearly $100, Walter was no value buy.
The company's debt now exceeded its equity by a 3-to-1 margin. So it was only a matter of time before it slashed its dividend. And in mid-2013, that's exactly what happened.
Investors of WLT – already reeling from staggering capital losses – suddenly found their dividends slashed from $0.50 per share to just $0.04 per share.
Cutting their anticipated earnings by 92%.
Needless to say, investors oblivious to Walter's predicament were positively annihilated.
And the market responded exactly as you'd expect: BLT shares promptly fell another $5.00 per share.
By July 15, 2014 this once-mighty stock traded for a mere $5.43 a share – less than half the value it held 18 years earlier.
And an apocalyptic 96% plunge from its April 2011 high of $138.10!
A Yield-Slash Crash can happen
Some people think crashes only occur when the market is troubled. Wrong! A Yield-Slash Crash can happen at ANY time – no matter what the rest of the market is doing.
It doesn't matter if we're in the middle of the biggest bull market rally in history. If a company can't afford its dividend, it can only float the payments for so long.
Eventually it has no choice but to cut the yield. And when it does, the price of the stock will almost certainly drop like a rock.
What's more, sometimes debt isn't even the issue. Unexpected problems can also cause a company to cut its dividend.
Most investors see big oil as a "can't-miss" dividend investment. But even here, your wealth can be wiped out by a Yield Slash Crash. Just ask investors of British Petroleum (NYSE: BP).
Few companies are bigger than BP.
The company generates close to $400 billion in annual revenue. And its market cap is close to $160 billion.
Yet this oil giant – with long a history of dividend payouts and dividend increases – not only cut, but eliminated its $0.84 per share quarterly dividend in 2010.
The public culprit for the cuts was the tragic explosion in the Deepwater Horizon oil rig in the Gulf of Mexico, in which 11 workers died and the company faced billions of dollars in fines and cleanup costs.
The crisis proved devastating for income investors, as BP was largely owned by pension funds in the U.K. and U.S. But the truth is, they should have been alert to the risk.
The company had a checkered history of accidents due to poor maintenance caused by excessive cost cutting. And those holding the stock paid dearly for ignoring it.
Because they not only lost their dividends – they also lost more than half the value of their investments!
Of course, the effects can be
American International Group (NYSE: AIG) was once hailed as one of the top insurance companies in the world. Year after year, earnings, revenue, and dividends remained on an upward trajectory.
That is until 2008, when all hell broke loose.
Instead of sticking with basic insurance, AIG wandered off the ranch to sell insurance on the exotic. And that should have been a big warning flag alerting investors the company was venturing into risky territory.
You see, AIG had begun selling credit protection through its London unit in the form of credit default swaps (CDSs) on collateralized debt obligations (CDOs). It entered into CDSs to insure $441 billion worth of securities originally rated AAA.
However, $57.8 billion of those securities – over 13% – were structured debt securities backed by subprime loans... which were anything but AAA once the housing collapse began to snowball.
Yet even as AIG found itself posting huge losses, it not only continued to pay dividends but actually raised them.
It was a desperate move that failed to stem the company's losses.
AIG would have collapsed if it hadn't been bailed out by the Federal Reserve, the U.S. Treasury and the U.S. taxpayer. To the tune of $182.3 billion.
When the dust settled, AIG was 92% government-owned. And Uncle Sam promptly forced the company to eliminate its dividend.
So as far as investors were concerned, it did collapse. They responded by slashing the stock's price. And even today, the stock is still down 95% from its January 2008 level.
How to protect yourself
Yield-Slash Crashes can happen at any time and with virtually no warning. But have faith. You can protect yourself and your portfolio. And in a moment, I'll show you how.
But first, there's something very important I want to stress.
Even with everything I've covered above, nothing beats a dividend stock when it comes to safely and steadily growing your wealth. Especially in today's world of pitiful interest rates and stock market volatility.
Dividend stocks are the smart investor's secret weapon. Because you get two streams of income from every investment!
First, you collect capital gains as the stocks you own go up in price. And for most investments, that's all you get.
But with dividend stocks, you also get paid to own the stock. Every quarter – sometimes every month – you get a check in the mail paying you a portion of the company's earnings.
Owning the right dividend stocks can provide a steady stream of income that both increases your wealth and finances the retirement or lifestyle you've always wanted.
These stocks can literally pay for themselves even before you cash out and grab your capital gains.
Each payout you receive reduces the cost of your investment. And by using a portion of your dividends to buy more shares, you can increase the size of your checks... and turn a small stake into a substantial sum.
Eventually, your monthly or quarterly dividend check can even surpass your initial investment – turning all future profits into FREE money.
And that's a feeling you'll never forget!
Three ways to spot yields
As a general rule the higher the yield, the greater your risk. But there are always exceptions. Even low and moderate yields can prove too good to be true if the fundamentals don't add up.
Luckily, figuring out which stocks can afford their dividend payments isn't all that hard.
You just have to do your homework and know what to look for. And here are three easy ways to tell if a yield is too good to be true...
1. Does the company have enough cash?
We often hear companies boast about their earnings. But when it comes to a company's ability to pay its dividends, earnings aren't nearly as important as cash.
When considering a stock, make sure its earnings and cash flow – specifically, cash flow from operations – follow one another.
Because a company can't write checks to investors without cash in the bank to cover them. And it can only rely on cash raised from debt and equity issuances for so long.
2. Is the company too deep in debt?
Debt is another factor savvy investors always consider – especially with income investments. Because it's much harder for a company deep in debt to maintain its dividend, much less grow it to please investors.
The more debt a company has, the more money it needs to service its debt. And that means the company has less money available for operations, growth, and sharing profits with its investors.
3. Is the payout ratio sustainable?
In order for a yield to be sustainable, it has to leave the company enough cash to service debts, cover expenses, and grow the business.
And while every company is different, no company should pay more than 50% of its earnings as dividends.
If a company pulls in $2.50 per share in earnings, the maximum dividend it should pay is $1.25. Anything more risks not having enough capital should anything go wrong.
And if a company pays a dividend greater than its earnings per share, watch out! There's no way the company can maintain payouts like that for long. And soon enough, the house of cards will come crashing down.
The easiest way to perform
Of course, the easiest way to perform your due diligence is to have someone else do it for you.
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