Bermuda-based Nordic American Tanker (NYSE:NAT) has long been a standout performer in the oil tanker business, offering a transparent balance sheet, straightforward operating model, and best of all, fat dividends. While Nordic American deserves its high marks within the sector, it is long-time shareholders who have funded the company's success, and they've taken more than a few blows along the way.

Now, I recognize that despite the preceding statement, tanker stocks tend to have a dedicated following among investors, and why not? Nordic American sports a 14.4% five-year average annual dividend yield; for competitor Frontline (NYSE:FRO), that number is an even more impressive 23.8%. Meanwhile, one analyst projects that shipper Teekay's ship-owning subsidiary Teekay Tankers (NYSE:TNK) will offer a 19% yield over the next four quarters starting with the just-completed fourth quarter. Wouldn't such payouts make anyone with half a brain high-tail it out of landlubbing dividend payers like Pfizer (NYSE:PFE) and Altria Group (NYSE:MO), considering their comparatively meek 7.0% and 8.4% yields?

As explanation, we can rather quickly cite the market-based volatility in tanker companies' shares: The one-year stock price charts reveal several hundred percent upswings and halvings. Buy in at the wrong time and it could take years of dividends just to break even on your original investment. But in the case of Nordic American, market volatility is only half of the downside.

Dishing it out -- new shares, that is
Admittedly, the worrisome characteristic to which I refer doesn't exactly jump right out at you. An initial clue, however, is the highly visible but sometimes overlooked payout ratio, a metric that expresses the dividends paid out as a percentage of total earnings. For NAT, that number is a whopping 198%. Basically, the company hands over to shareholders all its earnings, then, in order to distribute even more greenbacks, finances an amount equal to 98% of earnings!

But wait a minute. Nordic is currently debt free. How did management pay down the debt that it continually draws on for dividend support?

Answer: shares, shares, shares. Going back to October 2004, Nordic has issued stock every single year for a total of six offerings. In company statements, offering proceeds are said to be used for some combination of debt repayment and new tanker purchases. Average shareholder dilution per offering amounts to a very unfriendly 22.9%.

Granted, compared to taking on debt, share offerings can be a cheap and predictable source of strategic funding. Over time, however, investors should look for a return of value that at least matches, and ideally exceeds, the rate of shareholder dilution. To assess Nordic's performance in this area, we can compare yearly dilution to change in earnings per share and dividend payout.

Year

2004

2005

2006

2007

2008*

Share Dilution

30.0%

27.4%

54.1%

11.4%

14.7%

EPS change

40.1%

(25.2%)

3.6%

(50.3%)

100%

Dividend change

58.7%

(13%)

39.1%

(34.9%)

28.3%

*EPS and dividend numbers are year over year. 2008 EPS results include quarters 1-3 only.

Notwithstanding the fact that 2008 is shaping up to be a darn good year, we can see that there is no clear, longitudinal correlation between the growth powers provided by share offerings and increased shareholder value. Rather, the results are choppy, as underscored by annual change in return on equity: ROE plummeted from 13.7% in 2006 to 6.9% in 2007, and is now back up to 13.7% on a trailing-12-month basis. This is what you get when operating in the wildly volatile Suezmax spot market.

Having run the numbers, it is not hard to see why the stock tends to sell off after the announcement of a share offering. Not knowing what the new shares are going to be able to return in revenue, earnings, and dividends, the market prices in the worst. From a shareholder perspective, one could argue that an investment in NAT amounts to watching value disappear in one form -- share dilution and negative market reaction -- and reappear in another -- juicy dividends.

Buy, sell, or mutiny?
At this point, you may be in the mood for the more predictable performance of such dividend payers as McDonald's (NYSE:MCD) or Novartis (NYSE:NVS). But let's see if we can't play devil's advocate.

First, Nordic did not cast the proceeds from its share offerings into the wind; unlike a failed R&D program, shareholders have concrete assets in the form of new ships to show for the expanded share base. Furthermore, an early November company announcement discussed the challenges faced by competitors who have relied on credit to bankroll new tanker builds. In that light, Nordic's history of printing shares appears almost cagey. As for the portion of share proceeds that went to repay the debt financing used to fund dividend disbursements, well, as silly as this money churn might appear, it does not amount to a management-led ransacking.

So, it is not all pox and hex on NAT stock. Rather than "buyer beware," I submit that this is more a case of "buyer be aware." What you'll get as a Nordic American investor is not necessarily pain and suffering, but it is markedly different from the first-glance impression. A long investment horizon appears to be required, and if you're itching to buy, I suggest waiting for the market to digest news of what is sure to be another share offering at a future date.

Fool contributor Mike Pienciak does not hold shares in any company mentioned. Pfizer is a Motley Fool Inside Value and Motley Fool Income Investor recommendation. The Fool owns shares of Pfizer and is investors writing for investors.