Not exactly a scientific measure, but it has rung true that a warning about the sustainability of a dividend is a high yield percentage.
This is especially dangerous trap for the income oriented investor. There are many reasons why you would fall in to this trap. For me the path to the slaughterhouse was the influence of:
a) slow gains and returns from a 3-4% dividend yielding stock
b) the seductive lure of high yield distributions of REITs.
c) a rising market that outstrips steady dividend gains.
When you mix these factors together the allure of a high yielding stock that can goose your total portfolio yield it becomes ever more seductive. Excitement grows when you see the stock is pumping out tax efficient dividends vs. income from distributions. What seals the deal would be the capital gains from the movement of the stock.
These are potential time bombs are just waiting for the right time to melt off your face. Despite my planning for scenarios and keeping track of what could go wrong; seeking yield overrides caution with greed and rationalizations.
Shares: Bombardier Preferred Shares Series 2
Symbol: BBD.PR.B
Initial Purchase Date: December 13, 2013
Average Price: $13.23
Current Yield to Cost: 5.23%
Current Price: $4.25
Current Yield: 16.29%
Loss: 67.87%
Account Type: TFSA
My original thinking for why to buy:
1) Redeemable at $25.50. So, at these levels it would be a significant gain if BBD redeemed.
2) Last time BBD halted their common's dividend back in March 31, 2005, pref b's dividends were untouched. Note, back then BBD's share price was $2.70 vs today we're at $1.11.
3) Pref B dividends are cumulative, meaning if dividends are halted for commons then it is more likely BBD would still pay the prefs, but even if halted there is still the "promise" to pay the missed dividends.
4) Monthly dividends means greater cash flow.
5) My broker supports DRIPs for non-DRIP equities.
6) Yield is attractive.
7) Possibility of government bailout? Ties in to fear #2/3.
What I feared/was cautious about:
1) Prime rate, what if it gets cut?
2) BBD's situation worsens significantly.
3) BBD's situation goes apocalyptic and the go bankrupt.
After all that, was accruing a 67.87% loss of principle in a Registered after tax account for a 5.23% yield to cost worth it?
I have a couple other examples of big losses thanks to chasing yield over the years that come to mind: CML Healthcare Inc (CLC) (2011), Petrobakken Energy Ltd (PBN) (2011), and Baytex Energy Corp (BTE) (2015).
