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By Lawrence Meyers
| March 7, 2017
Every now and then, I like to scan the absolute highest of the high-yield stocks to see if there is some undiscovered story hidden away. Most investors know, at this point, that high-yield stocks can be great things. However, a yield that is too high should raise suspicion.
The danger of a high yield that is, in fact, too high is that it may suggest the stock price has fallen dangerously low for a reason. Super-high-yield stocks whose prices have fallen precipitously because of some major problem within the company may herald that the yield is going to be cut back. The company may have liquidity problems.
But I look for these super-high-yield stocks to see if perhaps there is a value play in the mix — if the market has unfairly punished a stock or doesn’t see something I do.
So here’s a look at the three stocks with the highest yields to see if they are safe to invest in. Note that I exclude royalty trusts and shipping companies as these have special circumstances as securities.
Prices and data are from the original InvestorPlace story published on March 6, 2017. Click on ticker-symbol links in each slide for current prices and more.
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
Whispertome via Wikimedia
Stage Stores Inc. (SSI) is a company I’ve never heard of, despite it having over 800 stores across 39 states. It has a direct-to-consumer business that operates under the brand names of Bealls, Goody’s, Palais Royal and Peebles (as well as Stage). As I write, SSI stock trades at $2.13 and pays 60 cents per share annually, amounting to an incredible dividend yield of 28.1%.
Right away, I’m nervous because I don’t invest in retail stores. Consumers are too fickle, and just about anything can be purchased at Amazon.com, Inc. (AMZN). That being said, we have to stay objective and look at why this is at the top of the high-yield stocks list.
In early January, SSI reported a 7.3% decline in same-store sales during the holiday season, and revised Q4 EPS down to 20 cents to 35 cents from 60 cents to 95 cents. It also expects a loss of 70 cents to 85 cents for the year. So SSI is losing money, about $25 million this fiscal year, which is not a good sign.
That’s not necessarily a critically bad thing, if the company had positive free cash flow and lots of cash. But it doesn’t.
Trailing-12-months FCF is about $10 million. The company pays out about $17 million annually in dividends. SSI only had $19 million in cash from its last quarter.
I don’t see this dividend as sustainable. It will be cut or even eliminated. I will say that one good quarter could create a buying spree in the stock, so aggressive speculators may find a bottom-fisher here.
New York Mortgage Trust Inc. (NYMT) is an mREIT that invests in residential mortgage-backed securities, multifamily commercial mortgage-backed securities, and residential mortgage loans. NYMT trades at $6.37 and pays 96-cents-per-share per year, for an annualized yield of 15.1%.
Right away, I see news I don’t like. First, NYMT did a capital raise, but the bonds were issued at 96% of par AND pay 6.25%. Not only that, after backing out the expenses associated with the bond issue, NYMT only gets about 92% of the total issuing amount. In other words, this is a really expensive way to raise money, and if that’s the best NYMT can do, then why is it paying such a high yield?
Worse, this is a convertible bond, meaning investors can convert it into equity at about $7 per share. That could result in sudden dilution.
All this tells me is that NYMT is trying to hold on to the idea of paying this high yield through a very expensive capital raise.
TICC Capital Corp. (TICC) is a Business Development Company. These vehicles raise money, usually through low-cost debt, and then loan that money to companies experiencing growth, but which can’t get traditional bank financing. The loans tend to yield in the 9%-14% range, thus making BDCs potentially good places to find high-yield investments. They lend their money out at significantly higher rates than their cost of capital.
TICC trades at $7.32 and pays $1.16 per share, for a dividend yield of 15.9%, making it one of the top high-yield stocks in the market.
The problem with TICC is that the credit markets are getting very overheated. So, going back to this idea of getting low-cost debt, those costs are rising. They are usually pegged to LIBOR, and that benchmark is rising. TICC funded its last quarter’s dividend with 11 cents from net interest income, but the rest was return of capital.
That’s not always a bad sign, but in this case, coupled with how TICC generates its income, it’s not good at all. I think we have a dividend cut coming, and I don’t like that the credit spreads that TICC relies upon are contracting.
This article is by Lawrence Meyers of InvestorPlace. As of this writing, he held none of the aforementioned securities.
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