Dividends have not risen since 2008, and how could they? The stock’s yield has risen, but that has everything to do with a falling share price. R. R. Donnelly was a $27 stock five years ago. It now exchanges hands for $15 per share.
Ditto for telecommunications company Frontier Communications Corp (NASDAQ:FTR): although the company’s 9.3% yield looks tantalizing on the surface, its enormous payout has everything to do with a stock price in free-fall. The company’s profits and dividend payments are going in the wrong direction. That’s because Frontier Communications Corp (NASDAQ:FTR) is still heavily oriented toward traditional wireline telephone service, which is surely going the way of the buggy whip.
Frontier Communications Corp (NASDAQ:FTR)’s recent results bear this out. Frontier Communications Corp (NASDAQ:FTR)’s most recent annual revenue fell 4.4% year over year, and the company has been steadily less and less profitable over the past several years. Frontier Communications Corp (NASDAQ:FTR) booked $0.57 in per-share diluted earnings in 2008. Unfortunately, profits have steadily fallen since then, to the $0.13 in diluted EPS generated last year. At the same time, the company’s long-term debt has exploded, doubling since 2008 to more than $8.3 billion today.
This is why Frontier was forced to cut its dividend twice since 2010. All told, the company’s $0.10 per-share quarterly payout is 60% lower than it was just a few years ago.
High yields can be deceiving
The story behind these three stocks should serve as a cautionary tale for investors to not rush into a stock for yield alone. An investor needs to make sure a company’s high yield is not solely the result of a collapsing stock price due to deteriorating fundamentals.
I love dividends as much as the next income investor. I believe dividends are the best way to build sustainable, long-term wealth. Moreover, dividend changes are one of the best ways to see into a company’s soul, so to speak.
However, investors need to understand that not all dividends are created equal, and yield doesn’t tell the whole story. It’s absolutely necessary to do your homework before buying high-yielding stocks, to ensure you aren’t climbing aboard a sinking ship. Avoid these stocks and the headaches that come with investing in declining businesses.
The article Why You Should Avoid These Buggy Whip Stocks originally appeared on Fool.com and is written by Robert Ciura.
Robert Ciura has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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