By Alan Gula, Chief Income Analyst
We’re less than two months into the year, yet there have already been at least 17 substantive dividend cuts or dividend suspensions for U.S.-listed stocks.
Of course, many companies in the energy sector are being forced to employ minimalistic dividend policies.
In particular, the challenging offshore drilling market continues to put pressure on rig owners. Earlier this week, Transocean (RIG) slashed its dividend payout by 80%. This followed Diamond Offshore Drilling’s (DO) decision to entirely scrap its special dividend, which it had been paying every year since 2006.
In 2014, these stocks were coveted for their high dividend yields. Unsurprisingly, though, investors who indiscriminately chased high yields (so-called “yield hogs”) are now being punished.
Free Reports:
But don’t say you weren’t warned…
My Dividend Death Watch is quickly becoming the scene of a dividend massacre, with five of the 11 targeted companies now having cut their payouts.
| Editor’s Note: While you should be avoiding the dividend payers below, we’ve pinpointed another dividend stock with strong upside potential. What makes us so confident? Because once this force gets behind a small stock, it MUST rise. Click here for the full story. |
Vanguard Natural Resources (VNR), an upstream master limited partnership (MLP), just cut its distribution by 44%. It was at the very top of my list of unsustainable distributions.
The infrastructure MLPs on my list may take a bit longer to cut their distributions, but I do think they’ll have to axe them before it’s all said and done.
Meanwhile, many MLPs that I haven’t covered, such as Mid-Con Energy Partners LP (MCEP), will continue cutting their distributions.
But it’s not solely oil and natural gas companies that are feeling the pain.
Peabody Energy (BTU), the largest coal producer in the United States, curtailed its dividend in a bid to save cash.
Arch Coal (ACI), a smaller coal player, decided to do away with its dividend altogether. I’ve talked about how defaults are a virtual certainty in the coal industry, meaning many of the common stocks will go to zero – although a dividend cut is actually credit positive for Arch Coal’s bonds.
Cliffs Natural Resources (CLF), a natural resources producer with coal exposure, also decided to scrap its dividend in order to focus on reducing its net debt levels.
Going forward, I expect dividend cuts, including those outside of the commodities complex, to become much more commonplace.
For a preview of what’s to come, consider that a pair of business development companies (BDCs), Fifth Street Finance (FSC) and Medley Capital (MCC), both recently cut their payouts. I warned about Fifth Street Finance and its hidden leverage back in September.
This point can’t be stressed enough: In a low-interest rate environment, investors need to carefully examine the risks associated with high-yielding securities.
Safe (and high-yield) investing,
Alan Gula, CFA
| P.S. It really is a shame that investors continue to chase yield because other opportunities exist outside of excessively levered stocks or MLPs. In fact, there are several preferred stock closed-end funds trading at a discount to net asset value while offering 7% yields or higher. To see which closed-end funds Alan believes are the most attractive, just click here. |
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