For investors chasing high dividend yields, finding a bunch of seemingly solid stocks is only part of the challenge.
There are a number of companies that promise mouth-watering yields, but they're nothing but danger. Stay away unless you want to be scarred.
The Columbian state-controlled petroleum company Ecopetrol's financials are poor, and the company faces low oil prices, and more recently, production problems related to a bombing. MPLX's merger with another company hasn't worked out as it might have hoped.
Avoid the two stocks.
Ecopetrol: Danger From South America
On the surface, Ecopetrol's sponsored ADR offers an incredible 10.75% yield.
In fact, the stock's price has travelled way higher than expected, but it did so too fast, too soon, and is already much above analysts' price targets.
Moody's cut the driller to the cusp of junk early this year. This year, Ecopetrol has reduced investment spending, cut staffing, and changed its strategy, and the current low oil price environment does not bear good tidings for the company or its investors.
Colombia's history of crime and political tension are additional problems.
In May, for instance, Ecopetrol had to halt pumping on the country's second-biggest oil pipeline following a bombing by the ELN rebel group. In March, two rebel bomb attacks halted pumping operations along the Cano Limon-Covenas pipeline.
The company's finances aren't particularly healthy, either.
The 10.75% dividend yield depends on a payout ratio of over 300%. Simply put, the company is paying more than 300% of net income as dividends.
In 2011, it paid a dividend of $2.12 but the subsequent year cut it by more than 80%, to just 41 cents. If this happens again, the nearly 11% yield will drastically come down as it did from 15%-plus in 2014.
With debt levels ($17.54 billion) close to Ecopetrol's market value, the company is not a fit case for a dividend yield chase or stock investment.
Its plans to divest from non-oil assets to raise funds need to be executed perfectly, an uphill task.
The business scenario for energy stocks like these is fundamentally challenging. Stay away for now.
MPLX: Just a Pipe Dream
MPLX is the pipeline offshoot of refiner Marathon Petroleum.
Its dividend yield of 5.92% is another value trap. Structured as a master limited partnership, MPLX allows MPC to acquire pipelines and other midstream assets related to the transportation and storage of crude oil and refined products, among others.
Things were arguably on an even pitch until it merged with MarkWest.
Before that ill-timed transaction, MPLX was guiding for long-term distribution growth of approximately 25% per year. But early this year MPLX management forecast only a 12-15% distribution increase in 2016.
While the stock has recovered over the past three months (up 14.52%), the dividend cut should tell investors eyeing MPLX a couple of things:
First of all, commodity volatility is not over. Secondly, a much more leveraged balance sheet of MPLX cramps dividends. While MPLX's distribution growth remains among the highest for large-cap diversified MLPs, MPLX is playing it safe. This is because MarkWest isn't powering the expected short-term roar in cash flows.
If there is a continued slide in natural gas prices, meeting distribution targets could be a risk.
We agree MPLX's yield is not any safer than peers like Phillips 66 Partners, Shell Midstream Partners, and Valero Energy Partners. But MPLX's payout ratio of 250%-plus is certainly way higher than its peers.
Stay away from MPLX dividends right now, or buy and regret it later.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.