“If you pay it, they will come”
This is the motto of the yield chaser. The yield chaser comes in many forms and some readers have even suggested that I am a yield chaser. Are they correct? I am not sure, but I do like to find great stocks that pay a solid and increasing dividend over time.
There are others who define “yield chasers” as those who buy the riskiest of dividend paying stocks. These riskier dividend plays typically will pay a dividend yield in the double digits! That sounds great so far, but these huge dividends usually don’t last. Some of these companies actually pay out more money in dividends than they have earnings!
Dividend Payout Ratio
While a payout ratio of greater than 100% is possible, it is not likely sustainable. Investing in such companies is akin to paying off your credit card with a home equity loan. The available cashflow simply helps to defer the inevitable loss. Either you have to earn more money to pay off both obligations or spend less somewhere to make ends meet.
In the case of these companies, it is most likely that the dividend to the investor will be reduced. Reducing or cutting the dividend is much easier than cutting other costs or figuring out how to earn more revenue. We have seen this scenario most recently with a good number of financial stocks.
There are, however, companies that offer above average yields with acceptable payout ratios. You may want to have a look at companies that come through a “high yield – medium payout ratio” screen.
Stock Screen Criteria:
Payout: Latest Fiscal Year <= 60%
Dividend Yield >= 7.0%
P/E Ratio: Current <= 15
Market Capitalization >= 100 million
As I mentioned earlier, these higher yield stocks require substantial due diligence, but a simple screen like this one can give you a great starting point. Note that you must calculate the current fiscal year’s payout ratio using the latest earnings…this may give you a completely different story!
If you happen to have some money set aside for aggressive yield investing, these criteria will help to reduce some of the risks of yield chasing while still searching for exceptional dividends.