Some Fat Dividends Sit on Fat Business Problems

by Guest Author Dee Gill, Y Charts

A lot of investors collect dividend stocks as if they were merely better-paying bonds; something that will provide some predictability and security to an equities portfolio that share prices alone can’t. But when dividend payments become hush money – big payments intended to keep shareholders quiet about big problems — those stocks become a completely different kind of investment. These are not your Coca-Cola (KO) safety nets any more.

YCharts took a look at a couple of companies paying dividends of 11.7% and 6.8%, respectively, to see what kind of problems the big money helps silence. We also outline one cautionary tale from a former high-yielder as a reminder of the risks of betting solely on high dividend returns from weak companies.SouFun (SFUN) 11.7% Dividend Yield

SouFun, which runs Chinese websites listing real estate and home furnishings, launched quite the successful U.S. IPO in 2010. But its share price took a dive last year as evidence of a housing bubble in China grew. U.S. investors, who know a thing or two about the devastation a housing crash can bring, didn’t necessarily buy SouFun’s contention that its earnings are not dependent on a lot of real estate transactions.

SouFun responded with $2 per share in dividend payments; $1 announced in late July and another $1 in December. Together, those payments rather swamped its diluted earnings per share last year of about $1.24.

SouFun shares are down about 10% since a fourth quarter earnings report released earlier this month showed income down 24% from a year earlier.

SouFun Stock Chart by YCharts

RadioShack (RSH) 6.8% Dividend Yield

RadioShack’s annual dividend crossed into hush money territory in October when it doubled it ahead of a disturbing fourth quarter earnings report. On Tuesday, we learned that first quarter earnings are likely to be worse.

As YCharts has discussed before, Radio Shack is plagued by low profit margins on the mobile phones that seem to be about all these small-box electronics stores can sell these days. With competition from the phone companies themselves popping up like dandelions around every Radio Shack, it’s hard to picture a happy recovery any time soon.

Earnings stopped covering the dividend payments last year, but decent cash flow has kept it fed. Still, investors aren’t biting. Almost no one in the analyst community really likes these shares.

RadioShack Corporation Stock Chart by YCharts

Transocean (RIG) Formerly 6% Dividend Yield

Beaten down by an array of legal and operational problems, oil company Transocean announced this week that there would be no dividend payment in 2012. Not good news for those who bought the shares recently on expectations of considerable yields after the company boosted its dividend last year.

But while Transocean could have made more payments out of cash, its earnings had simply run out of anything to give. Costs associated with its part in the Deepwater Horizon oil spill were just the beginning of its trouble, which included aging equipment that made it difficult to compete.

Transocean Net Income TTM Chart by YCharts

Transocean has some fans in the analyst community who point out that the shares are far cheaper than its drilling sector competition. A judge also just released it from liability for a lot of the oil spill problems, which could greatly improve its appeal to investors. Perhaps a share price gain will make up for dashed dividend hopes after all.

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About the Author

Dee Gill is an editor for the YCharts Pro Investor Service which includes professional stock charts,stock ratings and portfolio strategies. YCharts® Pro offers proven stock ratings, data downloads, portfolio strategies and avanced stock screening. Free 14 Day Trial is available.