Buying stocks with super high yields can be quite tempting. It's awfully easy to say to yourself, "If I know I'm getting 7%, 8%, or more in just dividends, then I don't mind if the stock barely moves." The trouble with yields that high is that they often are a sign that the company is in trouble and that a payout cut could be coming soon. If that does happen, then the logic of getting your whole return through dividend yield alone gets thrown right out the window.
One thing that you need to ask yourself is why a dividend yield for a particular stock is so high. In the case of propane and home heating fuel distributor Suburban Propane Partners (SPH 0.25%) and fashion retailer The Buckle (BKE 4.25%) there isn't much evidence to support the idea that they can maintain their sky-high yields.
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A little too warm for comfort
The business model for Suburban Propane Partners is a solid one if you are looking for high yield with very modest growth. The company, which distributes and delivers home heating fuels such as natural gas or heating oil, is protected from fluctuation in commodity prices because it passes price differences on to customers. Suburban's revenue just comes from taking a cut for distribution and delivery. As someone who grew up in New England, I can assure you that heating fuel is one of the first bills people pay, so this implies a steady stream of cash for the company. Home and business heating fuel distribution is a rather mature market, though, so growth mostly comes from buying out small mom-and-pop distributors. This stability is why the company has been able to pay such a generous distribution that yields 13.5%.
The one thing that can blow up Suburban's whole business model is if demand from its customer base declines. That tends to happen when there are mild or warm winters. And in that regard, these past two winters have been business killers.
According to the National Oceanic and Atmospheric Administration (NOAA), the 2015-2016 winter in the contiguous United States was the warmest on record. For Suburban Propane, that meant a 17% reduction in heating degree days in the fiscal year 2016. As a result, the company brought in only $0.60 from its operations for every dollar it paid out to investors. Luckily, the company had a decent cash pile built up from prior years that allowed Suburban to pay its distribution without taking on debt. That was a one-time solution, though, because the company certainly doesn't have the same cash reserves to do it again.
While this past winter wasn't as terrible as the previous one for the home heating business, it was still a warm one. According to NOAA, this was the sixth-warmest winter based on the 123 years on record. Suburban has yet to release its second-quarter 2017 results, but it's not a stretch of the imagination to see it cut its payout because of this warm winter.
Those special dividends keep getting smaller and smaller
The Buckle has one of the more interesting dividend policies out there. Rather than consistent, growing regular dividends, the company elects to keep its regular dividend low and pays a generous special dividend at the end of the year. For example, in 2014, The Buckle shelled out $42.9 million in regular dividends throughout the year but paid a one-time special dividend that amounted to $133.7 million. It's a payout method that gives management some flexibility in capital allocation and the benefit of not having to commit to a payout over time.
The special dividend has become part of the investment thesis for dividend investors, though, since it provides such a generous cash outlay. Based on the company's results as of late, though, the special dividend could become much less generous.
The first thing that stands out in Buckle's recent earnings reports is the declining revenue numbers. Revenue has fallen below the year-over-year numbers every quarter since Q2 2015, and there are few signs that things are set to improve much. What was once considered a strength of the company -- it sells only third-party merchandise, thus being able to respond to changing consumer demand -- is now a major weakness. Without its own brands, it is particularly susceptible to online retailing. If customers can buy those same clothes from an online retailer with free shipping -- and likely lower prices -- they have fewer reasons to go into stores, especially since The Buckle isn't known for storewide promotional sales.
If these trends continue, and there is little reason to believe they wouldn't, then those special dividends The Buckle pays are likely going to dwindle over time. We have already seen the cash outlay for special dividends drop from that $133.7 million in 2014 to $48.5 million in 2016. It may take some time before its regular dividend has to be cut, but such a drastic change in special dividend payments suggests this 10.4% yield isn't destined to last.
