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Playing The Dividend Payout Game

Posted: Jan 26, 2009 13:45 PM by Will Ashworth

Tickers in this Article: HOG, UDR, NRF, SLG, LIZ, EXM

In the world of dividend yields, the 22% yield reported by Excel Maritime Carriers (NYSE:EXM), a dry bulk carrier, naturally has created excitement among investors who need to get returns from somewhere, when price appreciation fails. If you must play the yield game, examine each stock closely before investing. And ask yourself this question: Would I still buy this stock if it did not pay a dividend? Your answer should always be "yes".

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Margin Of Safety
In times of uncertainty, a struggling company will often cut, suspend or eliminate a dividend in order to preserve cash. Grappling to stay afloat, Liz Claiborne (NYSE:LIZ), for example, suspended its quarterly payout in December. Many other companies also have suspended dividends or plan to do so in 2009 if the economy continues to deteriorate. Investors need to evaluate each company's situation, paying particular attention to the quality of the company's earnings, the likelihood that those earnings will continue to grow and, most importantly, the company's ability to cover a dividend payment without affecting operations. It makes little sense to chase a 20% yield of a stock that proceeds to depreciate by an equivalent amount because of worsening financial conditions. (Learn telling factors that can help you evaluate dividends and avoid losses at Is Your Dividend at Risk?)

The Payout Screen
Considering stocks with a market cap of greater than $250 million, a trailing 12-month EPS of $2 or higher, a yield greater than 10%, an annual dividend payout of less than $2 and an average daily volume of 500,000 or more, Yahoo Finance's screening tool produced 11 results for evaluation. The following table illustrates the top five stocks in terms of earnings per share (EPS). With real estate stagnating, goods not shipping and consumers still abstaining from buying, the overall collapse of confidence in the economy has resulted in dropping stock prices, but skyrocketing yields. Thus, it is easy to see why each stock made it onto this list, but are they worth buying?

Company	Dividend ($)	EPS ($TTM)	Payout (%)
Excel Maritime Carriers (NYSE:EXM)	1.60	10.28	15.6
SL Green Realty (NYSE:SLG)	1.50	7.30	20.5
Northstar Realty Finance (NYSE:NRF)	1.44	6.83	21.1
UDR (NYSE:UDR)	1.32	6.26	21.1
Harley-Davidson (NYSE:HOG)	1.32	3.23	40.9

Too Good To Be True
Analysts estimate Excel Maritime's EPS will total $9.36 for 2008 and $3.11 for 2009. While it probably will earn more than $3.11 in 2009, the numbers are definitely heading south, so the dry bulk shipper most likely should be avoided.

SL Green Realty, a Manhattan-focused REIT, cut its quarterly dividend in half, from 79 cents to 38 cents in December, which saved the company $95 million in 2009 alone. Management hopes to use the cash to take advantage of opportunities in the New York City market or to pay off some short-term debt. A consistently profitable company, SL Green Realty should be considered. (Looking for an income security that rivals small cap stocks? It may be time to learn about real estate income trusts in our related articles What Are REITs? and The REIT Way.)

Northstar Realty Finance is another company looking to preserve cash. On January 20, the company announced that it would pay a dividend of 25 cents for the quarter and that no more than 40% of the dividend will be paid in cash, with the remainder being paid in stock. While this move will save Northstar Realty Finance $43 million in cash, it will not create the same long-term profit potential that exists for a company like SL Green. Despite Northstar Realty Finance's current yield of 38%, investors should probably pass.

UDR sold apartments worth $1.7 billion in the first quarter of 2008 and used the proceeds to pay down debt. The company has a spotty earnings record, however, and without the divestitures, it would have a hard time paying a dividend. Although UDR returns capital to investors through dispositions, its lack of consistency does not warrant this company a closer look.

Analysts estimate that Harley-Davidson will earn $2.33 per share in 2009. If it maintains its $1.32 annual dividend, the payout will jump from 41% to 56%. Frankly, it is hard to imagine its dividend staying where it is. Thus, this is one ride that should probably be avoided.

Bottom Line
With the exception of SL Green Realty, I see no reason to play the payout game. That's a sucker's bet anyway.

By Will Ashworth

Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.

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