By Tom Dyson
I screen the market several times a week for high-yield stocks. My search usually brings up around 75 companies with high yields. But this year, that all changed...Now my searches routinely bring up four times as many results. Yesterday, I screened the market for stocks with dividend yields above 7%, and my search returned 412 results. Thanks to a 25% fall in the S&P, which started last October, the market is stuffed with high-yield stocks right now. That's because stock prices have fallen, but the dividends American companies pay, in general, have not. I found dozens of stocks with yields over 20%... and even some with yields of 38%, 44%, or even 46%! Of course, most of these high-yield stocks are garbage... Usually a high dividend yield is a warning flag. Like the high interest rate on a junk bond. It means the company is likely to cut its dividend... or even go out of business. But sometimes you find diamonds. Yesterday, I was analyzing a stock with a 19.5% dividend yield. This company just raised its dividend. It was 2% higher than the previous quarter's payout
A good accountant can fudge 99% of the figures on a balance sheet or profit statement.
I spent the best part of five years putting together accounting statements for Citigroup by day and attending professional accounting classes by night, so I know.
Sales can be carried forward, costs can be taken off balance sheet, assets can be written down. Even warehouse inventories can be fudged. Accountants can choose to value inventories on a first-in, first-out basis or a first-in, last-out basis. It can make a big difference, but both methods are legal.
There's only one untouchable number in the corporate accounts: the dividend. Once it's paid, a dividend is a fact. When companies pay dividends, they mail out checks to every shareholder. The money leaves the bank and never comes back. There are no accounting standards involved.
As they say, "dividends don't lie."
Except for looking up its dividend history, I haven't done any research into the company that's paying out 19.5%. So the reality is, I don't know if this company is a diamond or a piece of junk that pays its dividend with borrowed money.
It's easy to tell if a company uses borrowed money to pay its dividend. Look at the company's earnings. Do they cover the dividend? If not, the company is using debt to make the payment.
The point is, when you sift through the highest yielding stocks in the market right now, you're going to come up with a lot of garbage... but you'll also find plenty of excellent companies with solid businesses. Buy these companies, and you'll receive large dividend checks – possibly as high as 25% a year – every quarter for the rest of your life...
In the meantime, I'll try to figure out the problem with the 19.5% dividend.
Comments