When you chase yield sometimes without prospecting the business well, you might be in for some hurt. Rickmers have to be conservative and STOP Paying Dividend.
One of the highest yielding stock on my Dividend Stock Tracker is Rickmers Maritime at 10% to 14% yield. Recently the share price stagnates at $0.30 but dropped to $0.20.
When folks ask me about it, I told them to prospect well, Rickmers as a shipping trust, were incorporated during the peak shipping cycle, so a lot of the ships was chartered out at very high rates.
Provided the charterers do not default, Rickmers enjoy high rates that will be very hard to revisit in a long time.
From the latest third quarter announcement, we can see they have a lot of charter expiring in 2016 at high rates.
The rates versus the average current rates is more than half, which means once renewed, the cash flow will drop in half.
The cash flow needs to pay US$400 mil in loans. Out of US$70 mil in EBITDA, $48 mil will be used to pay down the principal, US$15 mil in interest, it leaves just about US$7 mil to pay dividends.
To pay the current US$0.006 dividend per quarter, it requires US$20 mil in total.
So the dividend is unsustainable.
The lesson learn here is, if you have bought in, without having an understanding of the nature of how the cash flow comes about, you may not have factored in this chartered renewal problem.
While investing in passive dividend income is appealing, at the end of the day, understanding the business, understanding value, cash flow, business risk is just as important.
In the future, it is likely I will remove this stock from my Dividend Stock Tracker, which contains the prevailing dividend income yields of blue chip business, real estate investment trusts and business trusts.
- Have the World or Emerging Market Healthcare Stocks Outperform the World and EM Index? - November 26, 2023
- Retirement Spending Can Vary from 25% to 100%. Not your usual 2% to 3% a Year. - November 23, 2023
- If I Earn 10% Yearly On Average, and Inflation Averages 3% Yearly, I can Safely Spend 7% Yearly Right? - November 18, 2023