Investors tend to move as a herd in and out of the latest get-rich-quick scheme. One of the most popular trends is the search for high-yielding stocks.
This trend is driven by low bond and cash rates, risk fears stemming from the financial crash and recession, and the aging population seeking steady income from their investments. When managed wisely, yield investing is a proven method to help build wealth and generate income.
The worst way to participate in this lucrative trend is to simply chase the highest-yielding stocks. In the yield-investing world, bigger is not always better. In fact, ultra-high-yielding stocks are often flashing danger signals -- because yield increases as the stock price decreases.
It's critical for investors to understand that high yield does not always equate to high-quality stocks. To avoid becoming one of those high-yield seeking investors who get burned when their favorite ultra-high-yielding stock crashes, always look at the company's fundamental and technical picture. Looking at only the yield is a quick way to the poorhouse.
One example of an ultra-high-yielding stock that should be avoided by all but the most nimble short-term traders is Diana Containerships (Nasdaq: DCIX).
|@ Diana Containerships|
|The high-yielding Diana Containerships is right in the center of this global slowdown. |
This shipping company has an astounding 27.9% trailing annual dividend yield. Talk about a powerful attraction for high-yield seeking investors. However, all is not as it seems with the stock.
The slowdown in the world's economy has hurt the containership market. The International Monetary Fund projects world GDP growth to be just 3.1% in 2013. In addition, the IMF is projecting a continued slowdown in China and a negative 0.7% growth in the eurozone. None of these things bode well for the worldwide product shipping business.
The high-yielding Diana Containerships is right in the center of this global slowdown. While the company is optimistic that a recently secured loan facility, new share issue and acquisitions will enable it to continue paying out the dividends, the internal numbers tell a different story.
Time charter revenues fell to just over $12 million in the second quarter from close to $15 million a year ago. In addition, a net loss of $5 million was reported during the same quarter. On top of the weak performance, the company has announced that the next dividend will be cut by 50%, to 15 cents per share. Investors who are not paying attention to their holdings could easily be surprised by this lowered dividend.
A look at the technical picture shows Diana Containerships has been in a downtrend since June 1. It is trading solidly below the 50- and 200-day simple moving averages with slight technical support evident in the $3.60 range.
Risks to Consider: High yield without the support of fundamentals and company growth can be a dangerous signal for investors. While Diana Containership may become profitable given an improved world economy and prudent money management, the risk is simply too high right now for yield-seeking investors.
Action to Take --> If you own Diana Containerships, you may wish to close your position. I do not see any upside for this company over the next 12 months. If you see things differently, watch the stock carefully and be ready to sell should matters get worse.