Why is a Stock That Pays a 40% Annual Dividend...bad?

[TradeBot 10]

I'm looking at a company called Whiting USA Trust (WHX). The annual dividend is $2.14 - a 42.64% yield. EPS is about 2 and P/E is about 2.41x

 

This is a company that has been around for more than six years, and has varied in price from about $22.50 to $3.75. Currently, it is trading at $5.08. The ex-div date on 2/14 paid $.55/share. The dividends have ranged from $.45/share to $.70/share, paid on a quarterly basis since the companies inception.

 

Fundamentally, the company has zero debt, which is great, but it looks like the company total equity has been slowly dropping over the last 5 years. Somewhere in the neighborhood of 15% per year on average. Their retained earnings have been steady, and actually increased a fairly sizeable amount (+50%) over the last year.

 

They're performance compared to their industry looks strong.

 

My friend once told me that company's that offer dividends that have a ridiculous annual yield (>10%) typically do so because the company is weak and they want to drive the stock price up.

 

Which begs the question. If a company has a fairly stable stock price, and is paying out 30-40% in dividends annually...why wouldn't everyone and their brother want to own that stock?

[handle 10]

High dividends are there for a reason. Usually that reason will not be obvious or made known to you until it is too late.

 

They take 100% of your money now. Pay you 40% dividend for 2 years and then the stock goes to zero. They just made 20%.

[SIUYA 11]

Is it interesting or relevant that you did not say - what the company does, how it makes its money, why its paying a large dividend, what their business future projection are. etc.

It might be a single coal mine nearing the end of its life.

 

These might be more relevant in this circumstance than simply rattling off the numbers.

 

plus $22.50 to $3.75 and currently at $5.08 over the last six years does not sound that stable a price.

[MightyMouse 12]

Generally, the market perceives that the dividend is at risk of being cut when it is so many standard deviations away from the average dividend in that industry.

 

I have bought high dividend stocks in the past ( never more than 15%) and made great money. You'd be better off doing the research and creating a portfolio of such stocks, rather than looking at one.

[TradeBot 10]

I figured it out. It turns out this trust will cease it's operations once 9.1 MMBOE is produced and 90% of profits from the sale are distributed among the shareholders of the trust. That's estimated to be in March of 2015, and when the estimated value of the stock will drop to zero.

 

My question is, with the stock price valuation looking to be zero this time next year, would this be a great position to short? If a trust ceases operations and the stock drops to zero or ceases to exist, and I buy it at $5.25 a share, would that mean I would profit $5.25/per share, or would I lose all my money because the trust ceased to exist?:missy: