− FROM THE DESK OF CHIEF INCOME
STRATEGIST MARC LICHTENFELD −
Before we get to this week’s Safety Net, I’d like to briefly address the presidential election and some other upcoming news.
The market ripped higher this morning due to Donald Trump’s victory. Bond yields spiked as well.
We’ll also receive the Fed’s latest decision on interest rates tomorrow afternoon. It is expected that the central bank will lower rates by 25 basis points, or a quarter of a percentage point.
There are a lot of factors to take into account in trying to determine which way the market will move going forward. You shouldn’t put too much weight on today’s action. The market is likely blowing off a lot of worry about a number of things, including Vice President Kamala Harris’ plan to raise corporate taxes if she had been elected and the possibility of a protracted election in which no winner was declared.
The best thing you can do during volatile times like this is to sit back and wait for things to settle down. It’s usually not a good idea to react when the market has a big move on a news event, as there is potential for whipsaws.
One positive for dividend investors is that lower corporate taxes should mean that companies’ free cash flow will increase, which will help them pay and hopefully raise their dividends.
As always, Wealthy Retirement will continue to keep you apprised of the latest news and how it could affect your portfolio, so keep an eye on your inbox in the weeks and months ahead.
In 2021, I compared Nordic American Tankers (NYSE: NAT) to a crazy friend who you could either have the time of your life with or could get you arrested.
The problem with the shipping company’s dividend safety was that its dividend and free cash flow were as consistent as a contractor’s estimate for when your kitchen will be finished.
Since 2021, some things have improved. Free cash flow turned positive in 2022, grew in 2023, and is expected to nearly double this year.
However, there’s still a big problem: Last year, the company paid out 136% of its free cash flow in dividends. In other words, it could not afford the dividend it paid to shareholders.
This year, Nordic American Tankers is forecast to pay shareholders 77% of its free cash flow, which is a big improvement over 136% but still a little too high. Generally, I like to see payout ratios below 75% in order to feel comfortable that the company could afford its dividend even if cash flow were to come in below expectations or fall the following year.
Then there’s the issue of the dividend. In each of the past three quarters, the company has paid out $0.12 per share, which comes out to a tasty 15% yield on the stock’s current price. But over the long term, the dividend is all over the place, like the demands of a tired 3-year-old.
To be fair, Nordic American Tankers’ management team isn’t schizophrenic when it comes to the dividend. The company simply has a variable policy that states that the dividend is based on the previous quarter’s net operating cash flow.
A company with a variable dividend always has a high risk of a dividend cut. In this case, that policy means any decline in cash flow will result in a lower dividend for the following quarter.
All in all, things are certainly better now than they were when I last reviewed the stock in 2021. Cash flow and the dividend have both increased. The likelihood of a dividend cut remains very high, though, which is not surprising for a stock that yields greater than 15%.
Dividend Safety Rating: F
What stock’s dividend safety would you like me to analyze next? Leave the ticker in the comments section.
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