That 'good dividend' may not be so good

Supervalu reminds us that a high yield can be a red flag for a flailing stock.

By Jim Cramer Jul 13, 2012 10:27AM

Nothing makes me happier in investing than getting a terrific dividend from a company. And with good reason. Time and again we have seen outsized dividends hold off sellers and stop declines. We have seen the power of reinvesting dividends to compound gains. And we know dividends have provided about half the return investors have gotten in the past decade, a dismal decade for investing. If you pick stocks with good dividends, you are on the right track to successful investing.

 

Ah, but here's the catch. It's the phrase "good dividends," because we have found that not all dividends are created equal.

 

Take the sorry case of Supervalu (SVU), one of the largest supermarket chains in the U.S. and a company that had told us over and over again that it was confident in its dividend and that it understood how important it was to shareholders.

 

Remember, when stocks go down, yields become larger, as the dividend stays the same size but the divisor -- old-fashioned arithmetic -- becomes smaller. Hence you get a bigger yield from the division.

 

Few stocks in the S&P 500 ($INX) had a bigger dividend than Supervalu going into Thursday's session, not because the dividend was outsized but because the stock had shrunk.

 

On Thursday we found out what happens when we see this process play out for companies that have battered balance sheets and declining fortunes. The dividend gets slashed, or in this case eliminated, despite all protestations to the contrary that anything like that could occur, including assurances given to me on CNBC last year by the CEO, of comfort with that dispensation of cash directly from the company to you, the shareholder.

 

Craig Herkert, the CEO, when asked about why the company eliminated the dividend, cited "holistic" reasons, whatever the heck that is. All I can say is it was a mighty bitter pill for shareholders, many of whom relied on that dividend as an important source of income. That $0.30 yearly, while not making up for the hideous two-thirds decline in the stock since 2008, did routinely draw in buyers with each reiteration of confidence that the CEO made.

 

There are some important lessons here. First, the supermarket space has gotten incredibly hard lately, a combination of dollar stores becoming more competitive in name-brand offerings, Target (TGT) and Wal-Mart (WMT) moving in aggressively, and Whole Foods (WFM) taking high-end consumers from mainstream shops such as Kroger (KR), Safeway (SWY) and Supervalu.

 

But second, and most important, is that sometimes outsized yields like Supervalu's are out-and-out red flags signaling their own reduction or elimination. Before blindly buying into management's assurances, before thinking "How can I miss with that yield protection?" do the homework. Supervalu was clearly in a long-term spiral down, something that told you to be more skeptical of the company's "confidence" in the dividend than you might otherwise be concerned about.

 

To me it's another clear-cut case of the need for not buy-and-hold, the preferred conventional wisdom of graybeards everywhere, but buy-and-homework. If you had done the homework, I believe you could bet that management couldn't fulfill its assurances, and you could have sidestepped Thursday’s hideous losses, the worst in the S&P 500 ($INX). 

 

 


Jim Cramer is a co-founder of TheStreet and contributes daily market commentary to the financial news network's sites. Follow his trades for Action Alerts PLUS, which Cramer co-manages as a charitable trust and has no positions in stocks mentioned.



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10Comments
Jul 13, 2012 1:04PM
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That's why you only buy large cap iconic household name brands that pay dividends. So simple even morons can do it. Supervalue is NOT an iconic household name brand!
Jul 13, 2012 2:10PM
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large cap INDIVIDUAL STOCKS can suffer from fraudulent books,CEO zipper risk,oil spill risk,

drug death risk............etc...................etf's, properly hedged, diversify against INDIVIDUAL STOCK RISK

 

this is why more than 80% of the hotshot MBAS can't beat the market          but

properly hedged etf's do

Jul 13, 2012 3:20PM
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WHEN IT COMES TO INVESTING MY MONEY BE IT ONLY A PITTANCE, I AM VERY PROUD OF ONE THING, I HAVE NEVER TAKEN ANY OF THIS FOOLS ADVICE, EXCEPT TO DO THE OPPOSITE

Jul 13, 2012 1:24PM
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Double, double, toil and trouble; cook the books and market bubble.
Jul 13, 2012 3:42PM
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You've been investing for 25 years and you haven't made any money?  Let's look at the chart.

In 1987 (25 years ago), the S&P500 was anywhere from 200-400, as it was a very volatile year.  Let's say you had bad luck and bought the top around 400.

Today, the S&P500 is worth 1355.  That's means you should have roughly tripled your money, or about a 5% annual return.  And that's if you bought the top.  If you timed it better and bought at 200, you'd have an 8% increase.

Sounds like the problem is you and not the market.
Jul 13, 2012 11:44AM
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for the last few months this hack has been advising his idiot followers about YIELD protection....

why didn't yield protect super value? now he states the truth that some YIELDS aren't safe...

if he would just state the truth about himself...............NOBODY ...not even the great arrogant cramer

knows whether the books of companies are true(JPM just restated their 1st quarter)

 

so how can you have RIGOR or YIELD protection when you can't possibly know if the books are true?

 

properly hedged etf's are the correct way for individuals to be invested............but if this is true

then we don't need newsletters for 700 per year

 

Jul 13, 2012 12:21PM
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SUPER VALUE.....................another "accidetally high yielder" gapping down for the cramARcuns

 

follow him ,pay him,listen to him brag..............and lose your money 

Jul 13, 2012 4:16PM
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Im talking about real money not 5-8 % return. Why would someone risk there money for that. You can get much safer investments if thats all your looking for. Im trying to turn a half a million into 2-2.5 million so I can retire and not work the rest of my life.  
Jul 13, 2012 12:18PM
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why does his YIELD PROTECTION,RIGOR,HOMEWORK,CEO LICKING thesis constantly cause gap down stock picks?................BECAUSE IT IS FRAUD...........PUT THIS CRIMINAL IN JAIL
Jul 13, 2012 3:02PM
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I have been investing in the market for 25 years and have come to the conclusion that you cant make money in the stock market. At least I cant.But I keep trying.
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