A company that pays huge dividends may excite you all right; however as an investor you need to know where you are putting your money. You should not put your money blindly in any stock just because it pays you big dividends. You must be fully sure that the company can continue to pay such high dividends in the future as well before investing in it. The recent developments in the sectors, performances of their peers and their pay-put rates when compared to their counterparts are some of the factors that you need to analyze to take a call on the safety of a particular dividend stock. Wall Street analysts recommend that the following stocks should be stayed away from, though they pay high dividends. This is because the performance of these stocks is likely to crash in the near future, due to which their dividends would be cut down.
Reduced forecasts not sounding great
With oil prices crashing down to less than $50 per barrel, it is indeed a surprise that Noble Corporation (NE, Financial) has a high dividend yield of 8.1% currently. Noble, which involves producing diversified products for the oil and gas industry, needs a miracle to happen if it has to continue paying out such high dividends to its investors in the near future as well. During 2014, it earned a reasonable rate of $2.18 per share. This is good enough to pay current annual dividends of $1.50 per share; however not for a long time though. The company’s dividends grew by 200% ever since the second half of 2013. It is almost impossible for Noble to sustain this phenomenal growth in the coming years. To add insult to injury, anticipations of earnings per share have come down to $1.34 per share for the next year; hence it looks like there is no other way out except for Noble to cut its dividends; thereby creating a loss for investors, any time from now. The graph below shows the reducing trend of the share prices of Noble.
High interest rates will dampen profits
All real estate investment trusts should pay out 90% of their earnings as dividends to investors. Hence all REITs have very high annual dividends. One REIT that you need to stay away from is American Capital Agency (AGNC, Financial). The leverage ratio for this REIT is very high. Currently, for $1 worth of equity in its business, this trust has close to $4.8 worth of borrowings. The main source of income for a trust is the difference between the borrowing rate and the lending rate. With such a large amount of borrowing, AGNC is bound to suffer a lot when the mortgage rates are increased this year. The Federal Reserve has already announced that it would increase the mortgage rates this year. Once this increase is announced, AGNC’s profits would come down drastically, thereby completely destroying investors’ wealth. There are so many better REITs floating in the market currently; hence, it would do you a world of good to stay away from this one. The fluctuating trend of share prices of American Capital Agency is seen from the graph below:
Conclusion
These stocks teach investors an important lesson – Current dividend pay-outs should never be relied upon for investing in a particular stock. It should ring an alarm bell in the minds of investors when a company from the oil sector is paying out so well in spite of the sector performing disastrously in the market. This holds well for all the sectors; oil is just taken as an example because of the high volatility involved in it currently.
