A Reader Asks, I Answer
A reader messaged in asking about an article at Seeking Alpha that profiles Hi-Crush Partners (HCLP) which after it's recent distribution hike (distribution is the proper term for a "dividend" paid out by a master limited partnership) appears to lift the yield to an astounding 25%. The reader essentially was asking for validation of his thinking that this must be crazy risky.
> The story of what they do is intriguing. The investing landscape is littered with market darlings that could not maintain a 10% yield like Seadrill, Nordic Tankers and pretty much the entire shipping industry. The dividend just about tripled to $0.75 for its last payout. Does the article say what caused it and whether it is sustainable? My sense is this is a well known name and that if the dividend was permanently that level the stock would rally sharply and quickly. 25% in 2% world assumes a lot of risk, that I know, I don't know what the specific risk of this situation is. Hope that helps!
I think this is a crucial concept for investors. The first thing is the mechanics of a payout be it a distribution or dividend. There are three dates relevant to a payment; the ex-date, the record date and the pay date. On the ex-date the price of the stock (or MLP) is reduced by the amount of the dividend, it is trading ex, or excluding the dividend. So if HCLP really has a 25% yield then the stock would need to go up 25% just to break even on a price basis.
Here is a chart of the two stocks I mentioned in my reply; Seadrill (SDRL) and Nordic American Tankes (NAT). If you weren't engaged in markets ten years ago, I am not sure how to express just how beloved these stocks were by the dividend crowd. To say they were universally loved, with their yields back then in the sevens and eights, would be an understatement.
Over the years, I followed the stocks somewhat, included them in some theoretical blog posts about creating go for broke yield portfolios but never pulled the trigger. What I indicated in my reply was a bigger reason why; the higher the yield of a stock or bond compared to "risk free" treasuries the more risk they carry. There may never be a consequence for taking that risk and maybe the bullish case for HCLP will work out, I have no idea, but they did not work out at SDRL or NAT and there have been many others. When something has this high of a yield, if you can't figure out the risk then you should avoid it. Maybe the above linked article adequately addresses the risk for you (to be clear, I don't know if the recent distribution hike is sustainable) but it would be difficult for me to envision buying something with such a high yield for clients.
I wanted to touch on the situation with client holding Nike (NKE) and the Colin Kaepernick situation. On Monday I posted the following on my Facebook page;
> Having kept him on the payroll through all of this is brilliant on Nike's part. It costs them nothing to pay him, no matter how much it has been. In investing terms, it's essentially a free call option if he ever became popular again. I have no idea if launching this campaign now makes sense or not, we'll see.
This drew a lot of comments from both sides of the political spectrum. One friend predicted more price declines to come for the stock. My unedited reply to that as follows;
> slightly more than half of Nike's revenue comes from overseas and the US' favorability globally is quite low, this won't hurt foreign sales. Nike sells half of it's products to people younger than 25, 2/3rds to people younger than 45 which are markets mor favorably disposed to Kapernick's side. None of us on this thread are their primary market, this was a calculated move. None of us are smarter than the guys running Amazon or Nike among other companies. If people feel better for burning shoes they've already paid for then they should do that. Guessing what the stock will do tomorrow is not in my wheelhouse but if you look at a long term chart of the stock you will find much bigger blips than this one.
My assessment will either be right or wrong but this is a great example keeping political beliefs out of investing. I am drawing a conclusion mostly based on sales data and the belief that the people running the company are pretty smart.
And finally please check out my newly self-published book;
I am thrilled to announce that I have self-published a book on Amazon called Random Roger’s Rules: Building Blocks For A Happier Life.
It is a list of 100 simple rules (like heuristics) that focuses on basic philosophy, diet and exercise, career, volunteerism, investing, personal finance and retirement that are geared to removing obstacles that get in the way of people's happiness.
Being sick briefly as a kid helped me figure some things out for myself a little earlier than I think I otherwise would have. When I write blog posts that are related, the response is typically very positive; friends/blog readers seem interested in this type of content from me. Often, friends and colleagues come to me for related advice.
The book is also a fundraiser for Walker Fire (the department where I volunteer). Half of my net proceeds will be donated to the department to hopefully go toward buying a newer fire truck unless after one year the revenue from the book is less than $50,000, in which case it will go to the department's general operating fund.
This is the first time I've done something like this, so the layout may be a little clunky, but I think the content can help a lot of people.
I hope you'll consider buying the book and telling friends about it. Feel free to ask any questions publicly or by messaging me privately. Thank you!