Many income investors are so desperate for dividends today that they’re piling into practically any large stated yield they find. On the surface this may seem like a sound approach. After all, if the market pulls back again, dividends should support the stock prices of those that pay.
If the dividend is still there, that is. When companies slash dividends, investors typically slash their stock prices by double-digits. Recent dividend cutters have been pummeled in the months after announcing lower payouts ahead:
Fortunately it’s possible to steer clear of the next dividend disaster, thanks to a new “DIVCON screen” put together by the income strategy gurus at Reality Shares Advisors. I interviewed company principals Eric Ervin and Ted Meyer about it last week.
DIVCON (Dividend Condition) is a five-tier rating system that provides a snapshot of a paying company’s dividend health. Ervin, Meyer, and company combine and weight seven factors (such as cash flow, earnings growth, and shareholder payouts) to provide a comprehensive snapshot of a company’s dividend health.
DIVCON 5 is the best bucket. It means the dividend is in good shape, and there’s a 96.6% likelihood that it’ll be increased.
DIVCON 1 is the danger zone. It means the dividend is more likely to be cut than increased.
DIVCON Backtest Results: 2001 – 2014
Let’s talk about three high yielding companies in the DIVCON 1 category today. Not only does DIVCON not like them, but I don’t either. If you own any of these issues, you should sell them today. If you don’t own them, avoid them.
Three High Yielders in “DIVCON 1”
The pain likely isn’t over for Wynn Resorts (WYNN) shareholders. DIVCON doesn’t like its reduced dividend, and neither do I. Over the last two quarters, mogul Steve Wynn paid his shareholders more in dividend per share ($1.00) than his company earned per share ($0.91).
When Wynn cut the dividend 67% on April 28, he told investors that it’d be “foolish to issue dividends on borrowed money.” Unfortunately, he’s doing exactly that.
FirstEnergy (FE) slashed its dividend by a third in January 2014. That’s not what you want to see from a utility. The company still pays 4.6% today but DIVCON believes the pain isn’t over yet. A rising and already high payout ratio (75% over the past two quarters) is a big concern, as are the company’s declining profits – earnings per share (EPS) have come in lower in each of the last four years.
Marathon Oil (MRO) had boosted its dividend each of the last three years. DIVCON thinks the streak is dead – probably because the company has lost money in each of the last three quarters. Yet it continues to pay $0.21 per share each quarter despite losing $0.53 per share in the most recent quarter. Something has to give, and it’s probably going to be the company’s 5.5% payout.
Aside from these five companies, I found twelve more yield traps that you should avoid, or sell immediately if you own them. I put together a report entitled The Dirty Dozen: 12 Dividend Stocks to Sell Now for you. Click here to receive a free copy of the report, and learn about the second-level income strategy I use to find secure 6%+ dividend payers.