Insights

Posted on February 2, 2015

The Too-Good-To-Be-True Dividend

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Published by Brett Carson

We’ve all heard the saying, “if it’s too good to be true, it probably is.” That’s how I feel about high yielding investments in this ultra-low rate environment. Just recently, my father asked me to look into a stock that was trading at nearly a 19% dividend yield that he heard about from a friend. Considering that a US 10-year Treasury currently yields less than 2%, I understood the attraction but knew that it was likely a high-risk investment that may cut its dividend soon. In fact, not only was it an oil and gas driller with volatile earnings, but it also carried an enormous amount of debt. It wasn’t a question of “if” it was going to cut this dividend but rather “how much.” That’s only part of the risk. Likely, the largest downside comes from what happens to the stock’s price after the dividend gets slashed.

In short, be wary of high yielding investments. Master Limited Partnerships have soared in popularity over recent years due to Central Bank’s “zero interest rate policy.” However, many cannot sustain current dividends without having to sell additional stock or raise debt, which will eventually result in dividend cuts when access to the capital markets becomes difficult.