Details not always necessary to make decision

By DAVID MOON, Moon Capital Management, LLC
June 2, 2013

One of the by-products of almost non-existent interest rates has been a herd-like rush to high dividend stocks. Not all dividends are created equal, however. Sometimes what appears to be an eternal wellspring of fresh water (or income) is simply a melting ice cube.

And professional advisers aren’t immune to misunderstanding or even being unaware of this risk.

A couple visited with us recently after their adviser had purchased shares of Great Northern Iron Ore Properties in their portfolio. The adviser patted himself on the back, proudly touting the stock’s 20 percent apparent dividend yield.

The couple didn’t know anything about iron ore in the great north, but they could recognize something that sounded too good to be true. As it turns out, Great Northern is. Only superficial research, however, would never reveal this.

The details are somewhat complicated, but they are important.

Great Northern is a trust that receives income associated with its leasing and management of mineral properties in Minnesota.

So far, so good.

If you read all of the footnotes of the company’s financial statements, however, you will discover that the trust terminates 20 years from April 6, 1995. That is, in less than two years.

At the termination of the trust, the shareholders will receive a final payment. Based on December 31, 2012 information, that final distribution is estimated to be $8.39 per share.

After that, the trust will cease to trade.

In other words, investors in this stock may think that they own a 20 percent yielding security when they will actually only receive two years’ worth of dividends and a final distribution – followed by nothing.

Based on the amount of the 2012 distribution and the current estimate of the final distribution, Great Northern investors will receive a total of about $34 per share before the investment terminates.

The stock currently trades at $68.

There are many types of melting ice cubes. Non-traded REITs often begin paying an immediate and attractive dividend immediately after their formation – even before the capital is invested in any real estate. The “dividend” is simply a return of the investors’ original investment.

Plum Creek Timber REIT appears to pay an almost four percent dividend. That sounds pretty attractive until you realize that this company is in the business of growing and harvesting timber – and it is funding the dividend with the sale of its timber lands.

In their attempt to stay warm, the company is burning the furniture.

You may not feel comfortable diving into the footnotes of an SEC filing. Few people are. But most people can tell when something sounds too good to be true.

When considering what appears to be an extraordinary investment opportunity, ask yourself why this opportunity exists. Ask your adviser “if the investment is so attractive, why haven’t investors bought so much of it that the price would increase?”

If there isn’t a good answer, you probably don’t need to be able to read financial statements to make a good decision.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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