When I created SafetyNet Pro years ago, my goal was to provide an easy-to-use tool where investors could ascertain whether their dividends were safe or susceptible to a cut.
Depending on the situation, a dividend cut can lead to a drop in the stock’s price. And for investors who rely on dividend income to pay their bills, a reduction in a dividend can have damaging effects to their financial well-being.
SafetyNet Pro was launched to help those investors avoid nasty surprises.
It’s important to understand that a low rating does not necessarily mean the stock should be avoided. SafetyNet Pro does not measure a stock’s potential for capital gains, only the safety of its dividend.
And its track record has been pretty darn good…
As 2020 winds down (thankfully), let’s take a look at some correct calls made by SafetyNet Pro that would have helped you avoid dividend disasters…
In February, I analyzed Invesco Mortgage Capital (NYSE: IVR).
I pointed out that the company’s recent history of paying its dividend was strong. In fact, it had raised the dividend for three years in a row. Invesco Mortgage was also generating enough cash to fund the payout.
However, it had a deep… dark… not much of a secret. The company had cut its dividend six years in a row starting in 2010.
That always concerns me. It shows that management will be quick to pull the trigger when times get tough.
And Lawdy, Miss Clawdy, times got tough a few weeks later when the economy ground to a halt because of the pandemic.
The quarterly dividend was slashed from $0.50 per share to $0.02 per share. It was raised to $0.05 per share in the most recent quarter, but it is still 90% below where it stood at the beginning of the year.
Prior to the cut, I determined that the company’s then-11% yield was not worthy of forgiveness. My doubt was well-placed, and its “F” dividend safety rating was well-deserved.
Invesco Mortgage Capital remains an “F.”
A week later, I reviewed one of the most requested stocks in this column, Annaly Capital Management (NYSE: NLY). At the time, it had a 9.9% yield.
Similar to Invesco Mortgage Capital, it had a nasty history of dividend cuts, including in the prior year.
Even worse than Invesco’s situation, its net interest income, which is how we evaluate mortgage real estate investment trusts (REITs) like Annaly, had been falling every year for years.
This year was supposed to be different…
But a near decade of terrible performance both from an operational standpoint and a dividend perspective made SafetyNet Pro give Annaly the lowest grade possible.
That lack of confidence was rewarded when Annaly lowered the dividend once again to $0.22 from $0.25 – its 12th cut in 11 years.
Annaly Capital Management remains an “F.”
In October, I wrote about NGL Energy Partners (NYSE: NGL), a company that had already reduced its dividend in 2020 but still had an exorbitant 20% yield.
Not for long…
I warned that the company’s distribution far exceeded its cash flow. And with its high level of debt and a couple of recent cuts, the distribution could not be considered safe at all.
Sure enough, three weeks later, NGL Energy slashed its distribution in half to $0.10 from $0.20, which is still a sky-high 14% yield.
Look for another drop in the distribution within the next year or so, as the stock maintains its “F” rating from SafetyNet Pro.
These three stocks were dogs in 2020, and SafetyNet Pro could have helped you avoid the wreckage.
Be sure to check this column every Wednesday as I review which stocks have dependable dividends and which ones are likely to leave a lump of coal in your portfolio.
I wish you a very merry and safe Christmas.