Dividends are often treated as a precious source of income for investors and are an important component of long-term stock market returns. The market, represented by the Straits Times Index (SGX: ^STI), has a dividend yield of 2.9% as of 30 April 2013. Thus, stocks with yields higher than the market’s would probably attract envious glances from yield-hungry investors. And, there are stocks out there with yields that are more than three times that of the STI, making them seem like fantastic deals. But as always, it pays to take a closer look at how those companies are…
Dividends are often treated as a precious source of income for investors and are an important component of long-term stock market returns. The market, represented by the Straits Times Index (SGX: ^STI), has a dividend yield of 2.9% as of 30 April 2013. Thus, stocks with yields higher than the market’s would probably attract envious glances from yield-hungry investors.
And, there are stocks out there with yields that are more than three times that of the STI, making them seem like fantastic deals. But as always, it pays to take a closer look at how those companies are faring. Let’s turn our attention to three stocks in particular, with double digit dividend yields.
Vard Holdings (SGX: MS7) – Share Price: $1.135
First on the list is Vard Holdings, a builder of ships and vessels for the oil-and-gas industry. It was formerly known was STX OSV but underwent a name-change after Italian oil-and-gas company Fincantieri bought a 56% stake in it on Jan 2013.
With its current share price, investors would be getting a dividend yield of 11.45% based on last year’s payout of $0.13 per share. That’s a huge dividend, being almost four times higher than the average yield in the market. But, the reason for such a high yield partially stems from its 37% decline in share price from a peak of $1.79 on March 2012.
The company has had a difficult 2012 as its per-share earnings fell by almost half from S$0.293 in 2011 to S$0.168 last year. Its recent first quarter results for 2013 seemed to continue the trend of declining profits as quarterly earnings per share declined by a third from S$0.050 last year to S$0.034.
It’s not all doom and gloom though, as management is optimistic about the company’s future outlook, citing the company’s “leading-edge technology as a differentiator that secures access to new orders.”
Nera Telecommunications (SGX: N01) – Share Price: $0.645
Next up, we have NeraTel, a telecommunication solutions provider which paid out $0.08 in dividends last year, giving shareholders a very high dividend yield of 12.4%. But, the company’s dividend pay-out ratio was 1.5 for 2012 – meaning it paid out more in dividends than the profit it makes.
Even with a clean balance sheet (NeraTel has $42m worth of cash stashed in the bank and carries only $1,000 worth of debt), no company can afford to keep paying more money than it takes in without seriously deteriorating its financial stability.
NeraTel’s recent first quarter results saw a 10% year-on-year decline in quarterly profit to S$5,844m and management sees intense competition and regulatory uncertainty in its business for the rest of 2013, perhaps casting some doubt on the ability to maintain its dividends in the eyes of potential investors.
Rickmers Maritime (SGX: B1ZU) – Share Price: $0.28
Rounding up the trio, we have Rickmers Maritime, a business trust that owns and operates 16 containerships with a total capacity of 66,410 TEU (twenty-foot equivalent unit). The trust paid out 2.4 US cents in distributions last year, giving it a distribution yield of about 10%.
But, in a similar case to Vard, Rickmers’ distribution yield has been pushed up partly due to a 27% fall in its unit price from a peak of $0.385 on Feb 2013.The drop occurred shortly after the trust released its full-year results for 2012 on 26 Feb 2013, which saw an 18% decrease in distributable cash flow to US$12.2m from the previous year.
The trust’s recent first quarter results for 2013 saw it post a negative distributable cash flow of US$4.23m for the quarter, which was worse than last year’s showing of a negative US$39,000 in distributable cash flow.
Rickmers also recently completed a 1-for-1 rights issue that raised a total of S$102m. The trust needed the cash to strengthen its balance sheet to meet covenants that’s required by its lenders and will be using the proceeds to repay some loans.
Foolish Bottom Line
The three shares we talked about all have high yields that look attractive on first glance. But, they also seem to face difficulties in their businesses of one kind or another. And, that’s the important thing with some stocks that are trading at seemingly attractive valuations – their prices have declined because of perceived difficulties with their businesses. These problems may or may not be surmountable, and that’s why investors have to pay attention to what they’re getting themselves into. As the caveat goes – buyer, beware.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.