With a shaky stock market and low interest bonds, I can see people going crazy for income producing assets. Some of them are the Highest Yield Dividend Stocks. However, chasing the highest yield dividend stock is not necessarily a good idea.
After reviewing a portfolio paying an 8% dividend yield, I wanted to share with you another example where high dividend yield doesn’t equal high investment returns after all. But before this, I invite you to see the top dividend payers in the US and Canada:
Highest Dividend Yield in USA
Highest Dividend Yield in Canada
Now, on with a little story…
Yellow Pages – Now The Investors Are Seeing RED!
If you go back to the beginning of 2011 on the Canadian Stock Market, there was a big change; the end of income trusts. Before January 2011, there were tons of companies that were able to distribute earnings before taxes through dividend payouts. In fact, only the investor holding the income trust units were paying taxes on the dividends received. This is how companies were able to distribute very high payouts to the benefit of happy investors. This tax structure was first put into place to encourage investors to invest in oil prospecting companies. But since investors are greedy, several companies started to convert into income trusts in order to generate more capital. Yellow Pages, known for its famous company directories, was one of them.
One of the Highest Dividend Stock Distributions, Highest Dividend Yield… but Lowest Investment Return
Upon its conversion, the Yellow Pages group kept a very high dividend payout structure. Since its IPO, YLO (which was previously YLO.UN) was distributing 8%+ dividend payouts. Investors were seduced by the promise of high dividend yield and the fact that company directories distribution produced a steady income stream.
However, those who bought one of the highest dividend yield stocks on the Canadian market probably ignored fundamental data. In fact, Yellow pages has been struggling with its current financial structure (high debt, high dividend payouts) and the growth is not there to support it! Their current strategy? Selling its Trader Corp. Unit for $745M to pay off a part of their debt and avoid a downgrading of their credit rating to junk. That’s pretty bad for a business once considered blue chip, trading as high as $16 back in the good old income trust days (2006).
YLO is definitely one of the highest dividend yield stocks in Canada with a 27% yield…
Lately, the stock plunged so fast that its current dividend yield is sitting over 25%! Financial analysts downgraded the company upon its inability to maintain its dividend distribution. Then, short sellers jumped into the game and pushed the stock to its lowest level. With such a high dividend yield, it is obvious that the market doesn’t expect YLO to go back up and maintain its dividend.
So was it worth it to chase YLO when its dividend yield was 8-10%? If you had only looked its previous dividend payout ratio, you would have noticed that the company was paying money it wasn’t generating… When the dividend yield is high and the payout ratio is over 100%, it’s never a good sign.
I would rather have lower yield dividend payers in my portfolio and keep my capital at the same time. A (ridiculously) high dividend yield should never be part of a buying strategy when analyzing a stock!
Disclaimer: I do not hold YLO.