Cursed dividend stocks

Stocks tend to underperform for at least a year after dividend cuts

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My last post was devoted to dividend stocks with pep, which highlighted dividend payers that have outperformed over the last year. Such stocks are said to have positive momentum.

But momentum works both ways. On the plus side, studies have shown that top performers usually go on to do well. On the other hand, stocks that have trailed the market often continue to slide.

Today I’ll focus on the laggards and the dark side of momentum investing.

Alas, some firms stumble even during good economic times. Those that run into real trouble usually see their shares tumble into Davy Jones’ Locker.

In such cases, it’s only natural to wonder whether a stock will be sleeping with the fishes permanently.  Thankfully, most stocks rebound from a bout of negative momentum over the very long haul.

But the bad times tend to persist for much longer than expected. Market studies show that stocks that have trailed the market significantly over the last 12 months tend to do poorly over the next 12 months.

Even worse, if the circumstances are bad enough then a company may be forced to cut its dividend in an effort to save money. Research shows that stocks tend to underperform for at least a year after dividend cuts. In most cases, they take it on the chin immediately after the cut is announced and continue to slump thereafter.

Stocks that have reduced their dividends and suffer from negative returns over the last year are doubly cursed. I used Bloomberg to find three big ones this week. They are Yamana Gold (YRI), Penn West Petroleum (PWT) and TransAlta (TA).

Yamana Gold is a Toronto-based gold miner with operations in Mexico and South America. The company’s shares have fallen 22% over the last 12 months and its quarterly dividend has crumbled from $0.065US per share to $0.038US per share over the same period. Soft gold prices haven’t helped the firm’s prospects.

Penn West, an oil and gas producer based in Calgary, saw its stock crumble 31% over the last 12 months. In addition, the firm now pays a quarterly dividend of only $0.14 per share, which is well down from $0.27 per share last year. In this case, large asset impairments and negative earnings have weighed on the company.

Last but not least, TransAlta is a well-known power generation utility based in Calgary that gave up 8% over the last year. The firm used to be a favourite of income investors. But that was before the company cut its quarterly dividend from $0.29 per share to $0.18 per share earlier this year. TransAlta’s earnings have been negative for a couple of years, which is never a good sign.

If you’re particularly brave, you might take a gamble on these troubled stocks. Barring further cuts, Yamana, Penn West and TransAlta provide yields of 2.1%, 7.1%, and 6.2% respectively. However, if you buy them, you’ll probably suffer from more than a few sleepless nights. More cautious investors might do well to wait before diving in to avoid the negative-momentum curse.

Safer Canadian Dogs

Investors following the Dogs of the Dow strategy want to buy the 10 highest yielding stocks in the Dow Jones Industrial Average (DJIA), hold them for a year, and then move into the new list of top yielders.

The Dogs of the TSX works the same way but swaps the DJIA for the S&P/TSX 60, which contains 60 of the largest stocks in Canada.

My safer variant of the Dogs of the TSX tracks the 10 stocks in the index with the highest dividend yields provided they also pass a series of safety tests, such as earning more than they pay in dividends. The idea is to weed out companies that might cut their dividends in the near term. Just be warned, it’s a task that’s easier said than done.

Here’s the updated Safer Dogs of the TSX, representing the top yielders as of Sept. 12. The list is a good starting point for those who want to put some money to work this week. Just keep in mind, the idea is to hold the stocks for at least a year after purchase—barring some calamity.


Name Price P/B P/E Earnings Yield Dividend Yield
Canadian Oil Sands (COS) $21.48 2.18 13.26 7.54% 6.52%
BCE (BCE) $48.34 3.36 18.24 5.48% 5.11%
Rogers (RCI.B) $44.89 4.51 15.43 6.48% 4.08%
Potash Corp (POT) $38.06 3.31 21.61 4.63% 4.08%
Shaw (SJR.B) $27.94 2.77 16.63 6.01% 3.94%
TELUS (T) $39.72 3 17.58 5.69% 3.83%
CIBC (CM) $106.80 2.48 13.48 7.42% 3.75%
Fortis (FTS) $34.34 1.51 21.6 4.63% 3.73%
Bank of Montreal (BMO) $84.60 1.81 13.04 7.67% 3.69%
Husky Energy (HSE) $32.62 1.57 16.31 6.13% 3.68%

Notes

Source: Bloomberg, Sept. 12, 2014

Price: Closing price per share

P/B: Price to Book Value Ratio

P/E: Price to Earnings Ratio

Earnings Yield: Earnings divided by Price, expressed as a percentage

Dividend Yield: Expected-Annual-Dividend divided by Price, expressed as a percentage

As always, do your due diligence before buying any stock, including those featured here. Make sure its situation hasn’t changed in some important way, read the latest press releases and regulatory filings and take special care with stocks that trade infrequently. Remember, stocks can be risky. So, be careful out there. (Norm may own shares of some, or all, of the stocks mentioned here.)

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One comment on “Cursed dividend stocks

  1. Sometimes the safest and best dividend stocks cut their dividends and all you can do is just hold on for the whole ride. I held onto my GE, IR and WFC after they each cut their dividend in 2009 and have been happy I held on to those positions till today. Of course, Washington Mutual cut its dividend never to return so it can be a difficult decision when deciding to sell out or hold on. Thanks for sharing this post.

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