Could You Love a Zombie Stock? Prowling for Fat Dividends Among the Un-Dead
With a massive tech revolution now firmly underway, the stock market is full of what we’ll call “Not-Dead-Yet Bets.” Many of these companies, tied to old school products like personal computers, landline phones and U.S. Postal Service mail, are big, cash-heavy organizations that pay outsized dividends while scrambling to build up other revenue streams. Investors take the bait on the bet that death will be slow enough, or new revenues will be big enough, to diminish the rather large risk of permanently depressed share prices.
The most popular Not Dead plays today are in the PC industry, where sales of smartphones and tablets are devastating the market. Dividend yields on companies that make PCs or parts have risen this year, both on falling share prices and direct appeals from corporations to investors.
PC maker Dell (DELL), for example, announced plans in June to start paying a regular dividend for the first time ever. Intel (INTC) announced last week that it would use some proceeds from a bond sale to fund stock repurchases. Share price declines on slowing core sales sometimes expand the dividend yields.
Bigger Not Dead dividends come in industries where the certainty of diminishing returns is more long-established. Postal meter company Pitney Bowes’ (PBI) dividend yield has risen to nearly 14% now that email has all but replaced traditional correspondence. (And the service that delivers it is near bankrupt.) Its share price is down more than 50% in the past two years alone.
Not Dead companies whose new revenue streams haven’t proved particularly lucrative also sport high dividend yields. Telecoms transitioning from the dying business of landline telephones into the technologically vulnerable and competitive businesses of Internet and television services are great examples. Winstream’s (WIN) dividend yield at 11.5%; Frontier Communications (FTR) at 8.4%; and Alaska Communications Systems (ALSK) at 10% are among the highest out there. But the beauty of those numbers are a bit deceptive. Both Frontier and Alaska recently cut their dividends, and there’s constant speculation that Winstream will follow. Their shareholders look generally unhappy even with those massive payouts.
There are other random examples. Garmin (GRMN), maker of stand-alone GPS devices that are also losing out to smartphones, pays a dividend now yielding of 4.4%. Investors are hoping that its devices used by boaters and golfers and other sports enthusiast will replace sales of the suction cup versions we all once used in cars.
A best-case scenario for Not Dead investors occurs when the company finds a new revenue stream in a hot new industry. Theoretically, the fast growth in the new industry keeps the share price bolstered even while the old business hangs around as a profit-margin sucker. AT&T (T) and Verizon (VZ) seemed to do just that when they began to move from landlines to mobile phones in the early century. So how did shareholders who saw that death coming make out? Here’s a look at total returns (share price plus dividends) from both companies against the S&P 500 during that time.
We never said this was the easiest way to make money.
Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at firstname.lastname@example.org.