Money & Risk Management
September 11th, 2018
October 26th, 2017
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Today, what I'd like to do is share with you some insights on high paying dividend stocks that pay you over 20% and the risks that go along with that.
What are dividends?
- It's a sum of money paid periodically, usually quarterly, to its shareholders from its profit
In simple terms, if you own shares of a company that's a dividend paying company, you get a sum of money that's paid to you in the form of dividends, mainly cash, into your trading account. So, every three months they pay you cash for just holding on to those shares and not getting in and out of them all the time.
- You get paid based on the number of shares you own - in other words, the more shares that you have, the more money you get
That's the way that they make it fair. For example, if you have ten shares, you're going to get much more than if you had three shares of the company. If you had 5,000 shares, you're going to make a lot more money than if you had just a thousand shares. Merely because they pay you on a per share basis. Because you're contributing much more to the ownership of their stock.
This is how some people make a fortune in the stock market. If you have a lot of money, let's say ten million dollars, and you have some excellent dividend-paying stocks, then you can make a reasonably decent living directly from the dividend.
There are some issues, of course, that goes along with this. People get attracted to high paying dividend stocks but remember in the market. You're making money from two different ways - at least from dividend investments:
- Number one, the dividend itself.
- The second way is also through appreciation. As that stock heads upward or it goes to the upside, you also make money. But if the stock goes down, then you lose your account value.
Keep in mind, some stocks can shed 30/50 percent. For you to make those dividends, to make it back in dividend from that depreciation, it actually would take quite a bit of time.
Keep in mind that you're looking for appreciation and also an excellent dividend payout rate.
For many people, they get sucked into these high paying dividend stocks where they're very speculative and very risky. That's exactly what I want to cover today.
I don't want you to fall into these traps. In general big picture concept, if you're investing in dividends, look for the favorite companies - the stable companies, which have been paying out consistently time and time again. Like a Walmart, Procter & Gamble, Verizon or AT&T. Those companies have been paying out time and time back.
I want to share with you some more speculative plays where they still pay out a dividend, but you should probably be aware of them. Most people should stay away from them. These are the things to watch out for.
I'll share with you some examples so that way you can see where the issue is in the aha moment.
TOO (Teekay Offshore Partners L.P.)
You can see that this one TOO the dividend payout or the yield here is 26.35%.
This is where people get a little bit excited. They're like whoa, 26.35%, that's fantastic!
That is because of the share price. You can't see it right the second. If I zoom a little bit here, you can see the share price is $1.67. If they're paying out $0.11 ($0.44 a year), it's quite a significant percentage or rate relative to its share price.
If I look up this company TOO and we go back, you can see it used to be a reasonably popular company at around $34 a share.
What's been happening? As you can see, the stock price went up a little bit between 2009/2014 and then just started to tumble on its way to the gutter.
Over the last few years, it just continued lower and lower. If you start looking at the weekly, you can see it's just so tight to get beyond that $10 range for the stock; you go into the two days. It just continues to sink so this one is pretty much toast for you - if you're looking to invest in this one you know.
Why would you want to put your money in here because of the dividend?
Maybe that dividend is going to go away.
That's the issue, some people that are guiding this one right here lost quite a bit of their account value. It used to be around $12/13 at this price point, and now it's $1. You're losing like 80/90 percent of your account value. Yes, you're getting 11 cents for every share, but that doesn't make up the difference for that ninety percent loss.
The thing is, when you're looking at this 26%, it sounds pretty good, but really if you take a look and you look at the payout, it used to be better. But the payout isn't stable.
That's the thing about these companies. You want to be a little more careful because they are a little bit attractive since you have a high percentage of 26%. But remember depreciation matters quite a bit as well.
BPT (BP Prudhoe Bay Royalty Trust)
I've never even heard of this one, but it's a $19 company. The dividend yield around 22%.
If you look at this one, you had a little bit here of a growth stage. Then after that stock from the 115 range just continued to tumble and now it's in this gutter.
If you look at this one, on the dividend basis, you can see the dividend is not stable, and you don't know when they're going to stop paying the dividend. You don't know when they're going to reduce it, increase it. Makes it very tough because remember it comes down to how much money they have on that balance sheet. If they don't have the capital to pay you - you may not get paid right.
Long story short, be careful with the high percentage yield because they do sound attractive, but in retrospect, it's quite risky.
SDT (SandRidge Mississippian Trust)
If you look at the share price, it's a 1.31, and the dividend yield right there is 21.8%. They're getting twenty-eight times a year, and that is because the stock is cheap.
SBT, if you look at it, the stock is toast. If you look at it for the last few years, it can't even get out. If you're dreaming and hoping that this thing eventually gets out, it's a little more delusional because you're expecting and wishing because most people are getting into the more popular companies.
There's a lot of popular companies. I'd instead get into the Mattel stock even though that one's not also doing so well but at least it's been holding up.
But then you also have AT&T, or you have a Verizon. It's a little more expensive, but you know comparing it here, this stock more than likely you're not going to get anything as far as appreciation goes.
VOC (VOC Energy Trust)
You can see this is the energy trust. You can see this has an A to B, B to C, C to D pattern. It's been under that $6/7 range for quite a while it's $4.19 right now
The dividend payout VOC is 20%. It sounds phenomenal but unfortunately only 84 cents every single year.
It's still a big company, and in retrospect, any company that's listed on the stock market is quite big but compared to other vehicles where you could put your money on there, this company is not one that I would want to go for because of the stock appreciation doesn't seem to be there and the dividend is also weak.
Combining it with those two factors, there are better places to put your money. Everything is competing for your money.
MSB (Mesabi Trust)
These are just high percentage dividend yield. It's not a full 20%, and you got a 16-17% range right here. $2.20 on the payout. When you look at the dividend payout, you're looking at 46 cents, 88 cents, 54 cents, 20 cents, 10 cents, 55 cents. It fluctuates. It's not very stable.
If you look at it on the chart, I'm looking for appreciation, and this one had some trouble.
Fortunately, the good news for this stock right here, it did have a slight little bounce because of these levels right there around the $5 range. So far that's been pretty stable.
What can happen?
This stock is bouncing right now, and that eventually try the $5 range again. Bounce a little more and then break the $5 range. Sometimes, these things, what they may end up doing is just prolonging the inevitable.
I hope by now you can see that high paying dividend stocks or a high paying percentage rate are not necessarily the only thing that you want because you can see that many of the stocks, the more than they pay out on a percentage basis, the more likely that they'll continue to depreciate. That is because they're compensating for the appreciation factor that's going on underneath the surface.
Companies like an apple, they underpay their dividend. Some companies don't even pay a dividend because they believe that the stock appreciation is what investors want.
If you're looking for a dividend place, you're looking for stability. You want some companies that are also stable that are paying out a consistent amount, where the dividend continues to grow in the future. It remains to increase with time rather than fluctuating or even decreasing with time.
Of course, you want that share price also to increase. So you're making money from those to end as far as a significant dividend is concerned as well areas stock appreciation goes.
Now, of course, you could tie in some options and sell some upside calls that go along with it. And now you're looking at doing or creating an income from three different ways in the stock market, but that's getting a little more complicated.
I hope by now you see and understand that the reality is that nobody gives you anything in the market.
The more than they pay out on a percentage basis for a dividend, the more that they have to compensate for their share price or the potential depreciation in that stock.
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Listen to the Podcast
Hey this is Sasha Evdakov and thanks for joining me here for another lesson.
In today’s lesson what I’d like to do is share with you a concept of how much money do you need just to get started into trading, just to start trading and start investing, how much money do you really need.
And then how to ramp that up or how does the growth process look like, meaning how much money can you really make and potentially how does that look like for your lifestyle.