Buying stocks with seemingly juicy too-good to be true yields can be a recipe for disaster. Stock prices change every day, but dividend data is lagging; so investors can be fooled into buying for yield, only to find that the dividend is later slashed or eliminated altogether, an event which is typically a negative for a stock. If you see a yield that seems out of whack, there is usually a good reason. If the market pushes a stock price lower, and the indicated dividend yield to lofty levels, it usually means that the market does not believe that the dividend is sustainable.
The market, in my experience, is not often wrong in such cases. However, in the current bizarro world we are living in, there are some examples that are defying that logic.
Big 5 Sporting Goods (BGFV) , one of the many specialty retailers that was crushed last summer in the great retail Armageddon, found its fortunes worsen by February, when it traded as low as $5.05. With a 15 cent quarterly dividend, that put the yield at a ridiculous 11.9%. With the market telegraphing a dividend cut, the company's fortunes have improved, and the stock is up 71% since that February low. The yield is still rather lofty at 7.14%, but if yesterday's earnings release was any indication, the dividend may have legs. The company beat first quarter estimates by nine cents, and also reported better than expected revenue. It also declared its regular 15 cent cash dividend. When I took a position, it was with the belief that while the stock had been overly punished, the dividend would be cut, so the last dividend, and the one announced yesterday are icing on the cake, that have been (and will be) reinvested in the stock. I am still awaiting that dividend cut...
Women's apparel retailer Cato Corp (CATO) , was arguably in worse shape than BGFV. With several terrible double-digit negative same store sales reports, CATO was all but left for dead; a struggling name in a terrible industry. By February, the stock traded at a low of $10.76; the quarterly 33 cent dividend put the yield at 12.3%. CATO's fortunes have since improved; the stock is up more than 50% since February, and comps have been improving. While the market was, and may still be, expecting a dividend cut with the current yield near 8%, CATO appears to have a longer dividend runway than the market believes, given the company's $197 million, or $8.14 cents per share in cash and short-term investments. This is another name I bought because as ugly as it appeared, the market's punishment was too severe, and not because of the dividend.
Then there's Dine Brands (DIN) , parent of Applebees and IHOP, which was limping along at $38 in September, down 50% from the prior year, and yielding a fat and seemingly unsustainable 10%. In this case, the company slashed the quarterly dividend 35% in February from 97 cents to 63 cents. The market surprisingly and uncharacteristically did not care, and the stock is up nearly 50% since the dividend cut, and has more than doubled since September. DIN now yields 3.42%.
Life is certainly interesting in this bizarro market world where up is down and down is up, but that can provide opportunity to exploit market inefficiencies.