Guest Post: Don't Believe Every Energy Dividend Story You Hear

Tyler Durden's picture

Submitted by Marin Katusa of Casey Research

Don't Believe Every Energy Dividend Story You Hear

My most recent trip to Calgary gave me a welcome chance to catch up with friends and colleagues in Cow Town's oil and gas sector. I found out about new projects, investigated companies of interest, and came away with an improved feel for the current state of affairs – what's hot, what's not, and why.

I also came away reminded of one of the dangers that lurk within troubled markets – and today's markets are troubled. Since mid-March, North America's exchanges have struggled, with the Dow Jones losing all the momentum that had propelled a spectacular 17% gain over the previous five months while the Toronto Stock Exchange also sputtered and slid, turning downward to lose its slight gains from January and February. Fundamental economic problems remain unresolved in the United States and Europe, while uncertainty grows over China's ability to control inflation and maintain growth.

The outlook from here is not great. When markets turn bearish, investment strategies often turn toward income stocks, and rightly so: if market malaise is expected to keep share prices in check, dividends become a very good place to look for profits. But whenever a particular characteristic – such as a good dividend yield – becomes desirable, it also becomes dangerous. The sad truth is that scammers and profiteers jump aboard the bandwagon and start making offers that seem too good to refuse.

It was just such an offer that reminded me of this danger. In the question-and-answer period following my talk in Calgary at the Cambridge House Resource Conference, an audience member asked my opinion of a new, private company that was offering a 14.7% monthly dividend yield.

Yes, you read that right: a 14.7% monthly yield, from a new, private, natural gas company.

I had met with this company the previous day and in that meeting the slick individuals who promised such glorious dividends got stumped by some pretty simple questions. When asked what the company's twelve-month payout ratio was, the individual responded with, "Our working interest varies between 25% and 70%." Perhaps he didn't hear my question, I thought, so I tried again. This time he stated that they pay a 14.7% dividend monthly… again, not answering the question. An interaction like this should set your spider-senses tingling. A few questions later it was obvious that they had no clue what they were talking about or trying to sell.

So, back to the very pleasant older man who asked the question at the end of my talk. My answer – which applies to almost everything in life – was this: if it sounds too good to be true, it probably is. If Apple, with highly robust cash flows and $98 billion in the bank, is only paying a 1.8% annual dividend, why would a small natural gas start-up be able to pay almost 40%? For a company to guarantee a return of that magnitude is completely ridiculous.

At the end of the talk I responded to many questions, but the highlight of the show for me came when the nice old man who asked me about the 14.7% dividend came up with his sweet old wife. They wanted to shake my hand and thank me. Those slick guys promoting that private stock had convinced this couple that the dividends from and return on this investment would solve their income issues in their retirement years, and they were ready to put down a fair chunk of cash. Thankfully, because I was quite open and vocal with my opinion that this private company was ridiculous fluff, the couple stayed away.

Ridiculous or not, those promises are out there. Unfortunately, promoters trying to cash in on investors' desires for the relatively security of dividends will promote these "deals" more and more as the market turns negative. It's just another unsavory characteristic of rough markets – preachers come out and make all kinds of impossible promises.

Thankfully, a few bad apples don't have to spoil the whole cart.

If you agree with the Casey-Research consensus that markets will remain volatile and generally negative over the next year, dividend stocks are a good way to get paid for taking on the risk of investing in a market that climbed notably through the winter without a lot of good reason. If the market from here generally moves sideways, non-dividend stocks will leave your portfolio stuck in place. If you buy dividend payers and reinvest the gains for further dividends, you can still profit from a bear market.

In addition, data suggest that top dividend payers have a history of outperformance, both in the US and globally. It makes sense: only a company with good net earnings can sustain a good dividend, so the two go hand in hand.

But the companies I'm talking about here are huge corporations with established revenues and proven track records. Moreover, good dividends and strong performance are correlated – there is no causality. The fact that the top dividend payers often perform well cannot be taken to mean that paying a high dividend ensures that a company will outperform.

For starters, take dividend yield. A company's dividend yield is its annual dividend payout divided by its share price. A high yield means big payouts relative to the costs of buying shares, so at first blush a high yield might seem like a good thing. But be careful: when stock prices fall, dividend yields rise. That means some of the worst stocks out there offer some of the highest dividend yields. Of course, such stocks are value traps – trying to recoup your initial investment will be like trying to catch a falling knife, and the dividend payments you banked will be of little comfort for the cuts you get on the way.

Then there's the basic point that a high dividend does not mean much if a company cannot continue to pay it in the future. Cash flow and profits should give you an idea of whether there is enough money around to sustain the promised dividend. For a more informed look at that relationship, check out a company's quick ratio, which compares liquid assets and current liabilities.

Those bits of information are the tip of the iceberg when it comes to researching how to choose the best dividend-paying stocks for your portfolio. That is not my goal here today. My goal is to remind you that, in investing, vigilance is always key and never more important than at the start of a downturn.

When things have been going well for a little while (or a long while), many investors stop asking the tough questions. Wanting to believe that the markets will keep climbing and the money taps keep flowing, they pretend downside risks don't matter. A usually cautious investor might accept that a company with an early-stage uranium project in remote Mongolia can access the millions of dollars needed for a pre-feasibility study, assume the price of uranium will keep rising and make a marginal deposit economic, or take a management team at its word that a project will receive regulatory approval. (If a management team ever assures you of project approval before it has happened, be very careful – good management teams never put the cart before the horse, and permitting any resource project anywhere in the world is a lengthy and costly matter.)

And those assumptions often work out, but only as long as the bull market continues. As soon as Mr. Market stumbles, yesterday's assumptions become today's value traps. Making matters worse, some promoters live to profit off investor mistakes and are always looking to capitalize on shifts in the marketplace. If a slowing market generates a shift toward dividend-paying stocks, these profiteers will start promising double-digit dividend yields, representing an appealing combination of yesterday's easy-money attitude with today's "income, please" perspective.

Traps like these are avoidable, but only if you get a handle on your greed. We all invest to make money, but greed – the desire to make lots of quick, easy money – will lead you into one value trap after another. Instead, you have to lead with your head. Before buying a stock, make sure you know why you're buying it and what you plan to do with it. Is it a long-term hold, with a proven management team and a well-planned strategy? Is it a takeover candidate – and if so, who are the contending acquirers and what is the timeline? Or is it a quick flip, based on a rising commodity price or an area play? In any scenario, do you have your exit mapped out? Is there enough liquidity to make a speedy exit?

Some scams and value traps are relatively easy to spot, such as the promise of a 14.7% monthly dividend. Others are much harder to avoid. More generally, investing is complicated and fast-paced, and every decision carries the weight of your hard-earned dollars. It is much easier to bear that weight with help from an expert.

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ruffian's picture

Title: Earthquake Information

Source: Japan Meteorological Agency


01:01 JST 14 Apr 2012 00:57 JST 14 Apr 2012 Fukushima-ken Oki M4.1 1

00:59 JST 14 Apr 2012 00:55 JST 14 Apr 2012 Sanriku Oki M4.8 1

00:30 JST 14 Apr 2012 00:26 JST 14 Apr 2012 Fukushima-ken Oki M4.4 2

00:01 JST 14 Apr 2012 23:56 JST 13 Apr 2012 Miyagi-ken Oki M3.3 1

23:58 JST 13 Apr 2012 23:53 JST 13 Apr 2012 Fukushima-ken Oki M4.2 2

21:56 JST 13 Apr 2012 21:52 JST 13 Apr 2012 Fukushima-ken Oki M3.6 1

21:33 JST 13 Apr 2012 21:30 JST 13 Apr 2012 Ibaraki-ken Oki M4.2 3

21:20 JST 13 Apr 2012 21:15 JST 13 Apr 2012 Fukushima-ken Oki M3.4 1

21:16 JST 13 Apr 2012 21:12 JST 13 Apr 2012 Fukushima-ken Oki M5.2 3

20:09 JST 13 Apr 2012 20:04 JST 13 Apr 2012 Fukushima-ken Oki M4.0 1

19:38 JST 13 Apr 2012 19:33 JST 13 Apr 2012 Fukushima-ken Oki M4.1 2

19:21 JST 13 Apr 2012 19:16 JST 13 Apr 2012 Fukushima-ken Oki M4.5 2

19:21 JST 13 Apr 2012 19:10 JST 13 Apr 2012 Fukushima-ken Oki M5.9 4 

Serious media blackout..........fukushima is being rocked by big quakes last 48 hrs. What's left of the reactors and fuel rod pools could topple at anytime. Do a google or yahoo news blackout..........why !!! but check this out above.............we could be on the verge of global contamination, that's why


J 457's picture

And somehow the hundreds of thousands of locals couldn't get even one report of this out to the rest of the world.

ruffian's picture

go to yahoo web, not news.....type in in fukushima earthquake......on left side click on last day and you'll see for yourself......they seem to have deleted the links from news but not web.....and dont really know what you're implying..........  or you can see them for yourself at this link. Of course things dont exist because you havent heard.....

NotApplicable's picture

Quakes of that size and frequency have been occurring there almost daily over the last year that I've been watching. I don't think that in itself is anything to worry about.

The spent fuel pool with no cooling going critical though, that's an area of concern. I've yet to hear whether repairs have been completed and cooling restarted. GW where are you?

ruffian's picture

Arnie Gunderson has reported a mag 7.0 would cause at minimum a breach of the spent fuel pool on the 3rd floor of Reactor 4  and possibly caausing it to come crashing down . Well we had a 5.9 today. The tremors are coming fast, furious.......20+ earthquakes of 4+ mag. in last 48 hours at the center of the worst nuclear accident in history and not a peep form Brian Williams? THAT is the worrying part !!!!

Short Memories's picture

It's not a media blackout, its just not news. I live in tokyo, over the last few days there has been a slight increase in tremors off the coast but since last year these are fairly common. When they happen a ticker on the TV screen shows the information and if the "Shindo" level is high enough then more details come through. My phone will pre warn me about 10-20secs before a larger one too.

Reactor status is sometimes mentioned too in the TV alerts. Is it getting worse each time? not sure, probably not, it's a mess over there though and leaking a bit still I'm sure. I own a russian made geiger counter and the air in tokyo is normal. we had only a brief spike last march/april from Iodine and thats it (half life is 8 days).

When my son and I go radiation hunting we can find some mild hot spots around drains where dirt and silt has deposited over long periods. you wouldn't want this cessium contaminated dirt under your pillow but at a distance of 20cm, it's hardly measurable. You have to nearly touch the counter to the dirt to see that it's high

Be a doomer based to facts, not fear! the world is going down the toilet, but not because of Fukushima.

TrulyStupid's picture

Thanks for the on location factual update. It's the most rational news I've heard from a trusted source. I'ts hard to believe that there was a time when MSM news considered it their responsibility to deliver this kind of first hand report. All we get now is a stone wall of horseshit from untrusted sources.

BooMushroom's picture

Rational, first-hand, on location, factual updates require knowledge, interest, work and fairness.  Horseshit requires a keyboard and a modem.  Small wonder we get more of the latter.

Element's picture

It's a 5.9 at the HYPOCENTRE of the quake, which is well off-shore.

They will feel and hear a rumble and get a few bumps at the reactor site -- which is a long way from the site of the shock.

A 7.0 (or more) would have to occur almost directly UNDER or withn 10km or so of the reactor to create widespread structural damage there.

CPL's picture

First open a private browsing windows in your browser.  Google news does screen by country.  Private browsing strips that information being sent which creates a very different world view.



If you want to find something in google you have to know how to talk to google.

Japan earth quake nuclear won't bring fuck all.  Take the sentence below and run it through google translator.  Cut and paste that into google news search.

(Japan|fukushima|yonezawa|yamagata) (earthquake|tremor|nuclear|fuel) (power|energy(on|off|out))

Cities around the nuclear plant.   Key word piles to jackpot hits and tune the search better.


Have fun.  the | is the OR operator.  Add key words as you see fit.

ruffian's picture

that sentence brings up nothing relevent to what I posted. I'm telling you, this issue is out there. Big brother has missed a few links.




CPL's picture


The news thread, nothing going on but some concerns about all that radioactive meat.  Use a plugin translator obviously

CPL's picture

Sorry took me a moment to scan around.


I am corrected. There is a board dedicated to the subject because of the Japanese's people's deep mistrust of the government and US influnces.


I recommend if people are going to lurk a little.

ich1baN's picture

I monitor all earthquake activity throughout the world on a daily basis. These quakes are nothing to worry about and they are not even close enough to really be felt in Fukushima. It's not news sorry to say.

CrashisOptimistic's picture

Why are you posting this on this thread?

ruffian's picture

the word energy is in the title, it's the lastest story and THIS IS IMPORTANT, no?

Nobel Physics Prize Winner Caldicott: "If Spent Fuel Pool No. 4 collapses I am evacuating my family from Boston"

CPL's picture

See how that makes Japan look like a child's romp?

FedBunny's picture

Helen Caldicott is a peditrician and environmental loonie. No Nobel Prize in anything, though peacenik groups she's palled around with have gotten the Peace Prize.

Element's picture

ruffian, you are clearly an idiot and or a troll, get lost.

BooMushroom's picture

google for Nobel Physics Prize Winner Caldicott gets you ZH as the second hit, with the first talking about Caldicott's PEACE PRIZE.


Actual physics winners listed here:

red arrows away!

CPL's picture

It's friday; spreading cheer, joy and search tips.


Otherwise for japanese news that's up to date you only had to go to and ask the anon's that live in Japan.  The image board is pretty popular.

Koffieshop's picture

Also don't forget the advanced search settings(click the cog symbol) that Google has.
It allows you to filter on the time of last update of the liked sites. Toggle the setting to only see search results that have been updated in the last 24 hours.

technicalanarchy's picture

When your eyes are tired and you read this line

00:59 JST 14 Apr 2012 00:55 JST 14 Apr 2012 Sanriku Oki M4.8 1


00:59 JST 14 Apr 2012 00:55 JST 14 Apr 2012 Sanriku Oki M 8.1

Well, I just have to say I spent the past 5 minutes evaluating what's really important.

Lol, I now know how I will react when it's the end of the world. I'll just google shit trying to find out what's happening. Pathetic!

oddjob's picture

Pot calls kettle black. Marin Katusa has left investors in carnage and bloodshed in most of the small cap stocks he has reco'd.

LMAO's picture

It takes one to know one...

"They wanted to shake my hand and thank me. Those slick guys promoting that private stock had convinced this couple that the dividends from and return on this investment would solve their income issues in their retirement years, and they were ready to put down a fair chunk of cash. Thankfully, because I was quite open and vocal with my opinion that this private company was ridiculous fluff, the couple stayed away"

.....and thankfully, because I was quite open and vocal with my opinion I was able to redirect a fair chunk of the couples' cash to another scam and value trap that wasn't as easy to spot and to which I was able to charge a sizeable commission.

You gotta luv these guys!

Rainman's picture

Suckers are born every minute. They make the world go round. Leave them be.

Yen Cross's picture

I don't believe that comment for one second " Rainman"

  I believe in you though! Terse' , late night comments and all?

navy62802's picture

Dividend seekers are fools.

flying dutchmen's picture

Wow Marin katusna is one of the same.  what about his renewable energy picks, hope nobody put their retirment funds in that(down 90%+).  Pumping junior stocks all day long ( this guys collect finders fees and pump).  They write newsletters for distribution.   I talked to the same company and this company might very well be able to pay the yeild ( i think it was 14 annual yeild/paid monthly)  but there is still a fair bit of drilling and reworking risk, and it is private  Way Way to risky..


If this keeps up my geiger counter will melt. THAT's when there are REAL problems. Nowhere in the world to hide..underground perhaps? Your entire lifetime...

SwingForce's picture

You get paid to write this shit? WTF, I could wipe my ass with your "report". 

billsykes's picture

Calgary fucking blows. A one hit wonder town. No culture, class, attractions and it is expensive at most major cities in terms of price and value. (people are friendly though, and nice- but NYC or montreal it is not)

Stock brokers love selling dividends to their clients- but its like eating your own vomit to save on grocery costs- its not right and it sacrifices quality.

You buy a stock for 1 thing for it to increase in value over time.

-with low corp. tax rates it nulifies the benifit of offsetting the tax

-ROC is better if used to fund growth (brokers fees, double tax, if you reinvest its sloppy and expensive)

-Western companies need all the cash they can to expand in growing economies

-Executives dont see much benifit as they dont ever own much shares anymore.

-Puts companies in a bad spot, sometimes having to pay the dividend with debt rather than cut it.

-if they cut it the stock plumets.

-Dividend companies are whores they will fuck anyone and take all comers and investors, who just want a piece every Q. Fuck you buy their bonds.



Yen Cross's picture

 Hey Cyborg, Wana get a Philly on Rye?

jonjon831983's picture

hmm interesting.


Good to know, thanks.

Widowmaker's picture

I suggest the author name the company.

Social mechanics will do the rest!

FranSix's picture

If you pay a dividend as a resource producing ccompany, you can make up for the losses against inflation if the share price has lagged the resource price.  This is especially true in the gold mining sector.  For every commodity player that pays a dividend, you would need to divide those profits by gold prices to be certain that your earnings are not being confiscated by inflation/currency depreciation.  In the oil sector you would not expect a heavy yield, but in the gold sector its entirely possible.

Secondly, dynamic hedging strategies using Black-Scholes options pricing models focussed against gold mining companies because so many turned out to be a dud that you could literally sell them first without asking questions and bet the money somewhere else.  You could then use immense amounts of leverage in such risk free strategies.  This is the way money is made in the commercial banking sector now, using long term strategies.

So as this is now the common practise, your dividend paying resource sector stock would need room for growth, basically be at the start of its life-cycle and potentially have exceptional controls on the balance sheet and grades.  To upset the dynamic hedging strategy model, they would have to pay on order of 5% per annum.

During the depression, your common gold miner (not the large producers like Dome and Homestake) did not see any share price appreciation at all.  Their share prices were fixed by the exchanges after the '29 crash.  They were the market darlings with astronomical values much as internet stocks enjoyed the same boom until the Nasdaq blew out.  But they paid dividends for decades into the 1960's where at least 1/3 of their revenue or more depending on the project was paid out regularily.

One example of a monthly divdend paying gold mining stock is GORO.

Cpl Hicks's picture

This is an overly long and very thin report to get to the obvious message that if it sounds too good to be true it probably is.

Tylers, you just threw this in because it's Saturday and the sun is out, right?

Grand Supercycle's picture

The Big Picture Wile E. Coyote Equity Top.

Prepare for a substantial USD rally.

W10321303's picture



Climate Tipping Points of No Return | Allianz Knowledge You +1'd this publicly. Undo May 23, 2009 – ... likely follow. The impacts on insurers such as Allianz will be profound. ... 12 Major Climate Tippings Points and why Allianz and WWF care ...


What's HOT!, that's really funny. The SOCIOPATHS will make their money...."Do the Wall Street you'd sell your Mother, you can buy another!' (The Wall Street Shuffle..10CC)

Combined sea level rise - global sea level rise (SLR) of up to 2 m by the end of the century
combined with localized sea level rise anomaly for the eastern seaboard of North America
Exposed assets in Port Megacities - A global sea level rise of 0.5 m by 2050 is estimated to
increase the value of assets exposed in all 136 port megacities worldwide by a total of $US
25,158 billion to $US28,213 billion in 2050. This increase is a result of changes in socioeconomic
factors such as urbanization and also increased exposure of this (greater)
population to 1-in-100-year surge events through sea level rise.
Exposed assets on NE coast of the US - The impact of an additional 0.15 m of SLR affecting
the NE Coast of the US as a result of the localized SLR anomaly means that the following port
megacities may experience a total sea level rise of 0.65 m by 2050: Baltimore, Boston, New
York, Philadelphia, and Providence. 0.65 m of SLR is estimated to increase asset exposure

Sadly, current climate models dramatically underestimate future abrupt climate change because ecosystem collapse is underestimated:

Leemans and Eickhout (2004) found that adaptive capacity decreases rapidly with an increasing rate of climate change. Their study finds that five percent of all ecosystems cannot adapt more quickly than 0.1 °C per decade over time.
Forests will be among the ecosystems to experience problems first because their ability to migrate to stay within the climate zone they are adapted to is limited. If the rate is 0.3 °C per decade, 15 percent of ecosystems will not be able to adapt. If the rate should exceed 0.4 °C per decade, all ecosystems will be quickly destroyed, opportunistic species will dominate, and the breakdown of biological material will lead to even greater emissions of CO2. This will in turn increase the rate of warming.

Reference: Leemans og Eickhout, 2004, Another reason for concern: regional and global impacts on ecosystems for different levels of climate change, Global Environmental Change 14, 219–228.

By the way, the world is committed to at least 2C of future warming. Here is what Climate Code Red says:
--Human emissions have so far produced a global average temperature increase of 0.8 degree C.
--There is another 0.6 degree C. to come due to "thermal inertia", or lags in the system, taking the total long-term global warming induced by human emissions so far to 1.4 degree C.
--If human total emissions continue as they are to 2030 (and don't increase 60% as projected) this would likely add more than 0.4 degrees C. to the system in the next two decades, taking the long-term effect by 2030 to at least 1.7 degrees C. (A 0.3 degree C. increase is predicted for the period 2004-2014 alone by Smith, Cusack et al, 2007).
--Then add the 0.3 degree C. albedo flip effect from the now imminent loss of the Arctic sea ice, and the rise in the system by 2030 is at least 2 degree. C, assuming very optimistically that emissions don't increase at all above their present annual rate! When we consider the potential permafrost releases and the effect of carbon sinks losing capacity, we are on the road to a hellish future, not for what we will do, but WHAT WE HAVE ALREADY DONE.