The Safety Net: This 21% Yield Is Doomed

Shipwreck_with_Umbrella

There’s nothing like finding a low-priced stock with a double-digit dividend yield.

And when that double-digit yield starts with the number “2,” you may even think you’ve died and gone to dividend heaven…

But, chances are you’re in for the kind of torment even Dante couldn’t have imagined in the nine circles of hell he outlined in his 14th-century poem “Inferno.”

In fact, let’s add a 10th level of hell to Dante’s classic – one where unrealistic yield chasers face eternal dividend volatility.

First, their 20% yields get cut. Then, just when they’ve gotten used to seeing their dividends get sliced, they’re given the hope of a dividend increase… only to go through the same excruciating experience again and again.

That’s what you can expect as a shareholder of DHT Holdings (NYSE: DHT).

The Bermuda-based oil tanker company raises and cuts its dividend regularly. Not because management is incompetent or because the company is having extreme problems…

But because DHT’s policy is to pay shareholders 60% of its net income in dividends.

Many companies have a target based on net income. The difference is that they’re flexible in order to keep the dividend somewhat consistent. Not DHT.

If earnings go up one quarter, shareholders benefit from increased profits. But if earnings slide, so will the dividend.

DHT’s dividend has been on an upswing lately. But it dropped by $0.02 last quarter. This chart shows when the dividend was cut and when it was completely eliminated in 2009.

DHT_Dividend_Per_Share

Normally, I look at cash flow to determine whether a company can pay its dividend. In DHT’s case, it can’t.

In the first six months of this year, free cash flow was negative, which means the company has to either raise debt or use cash on hand to pay the dividend.

DHT’s business isn’t bringing in enough cash to pay shareholders.

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