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Sell Block: Dividends You Can’t Trust

Cramer has urged viewers to seek out high-yielding dividends because they offer protection in a volatile market. As share prices fall, yields go higher, putting cash in investors’ pockets at a time when they might otherwise have been losing money. Also, bigger yields attract more buyers. When they pour into the stock, the share price climbs back up. So it’s a double positive.

But not all dividends are equal. Some, as Cramer likes to paraphrase George Orwell’s Animal Farm, are more equal than others. So investors can’t just jump at any attractive-looking yield without first knowing the backstory. Often times that share price has come down for legitimate reasons. Maybe the company is in serious trouble. If that’s the case, a dividend cut is more likely than a payout.

Cramer has been teaching viewers how to spot these unsafe dividends. Last week he pointed to trouble at Alcoa, which seemed to indicate a cut was imminent. Well, on Monday the company did just that. Even worse: Alcoa held a dilutive offering that raised $1.3 billion through convertible notes and 150 million common shares at $5.25. Apparently the money saved by the dividend cut just wasn’t enough to cover Alcoa’s debts.

This week Kimco Realty and Prologis got the royal treatment. Both offer double-digit yields that at first glance look great, but in the end didn’t hold up against Cramer’s analysis.

Kimco’s a shopping center REIT, paying out 19%. Of course, that’s because the stock has dropped to $9 from $47. The company lost $51.5 million just in the fourth quarter alone, and management said a dividend cut was likely by year’s end. Cramer expects that cut to be sizable.

Here’s why: Kimco needs money to cover the $200 million in company bonds coming due in the next year. And a Credit Suisse analyst said the company would need to raise about $1 billion in equity to pay down debt just to make the stock investable. Cramer likens this situation to Alcoa’s, where a dilutive offering followed a dividend cut. So who’d want to be in this stock then?

Even those measures might not be enough to save Kimco. General Growth Properties, a similar REIT, raised $822 million but still faces bankruptcy. When you add on a 10-year high in retail vacancies, it’s easy to see why Cramer doesn’t think Kimco is worth the risk.

Prologis, a warehouse and distribution REIT, yields 13% but already cut its quarterly dividend in February to 25 cents a share from 51.75 cents. The company also said it might have to pay at least some of its dividend in stock, which is the last thing investors want right now. Prologis has $260 million in bonds coming due by August, and its European division is trying to refinance $1.3 billion in debt that comes due next year. In fact, this Euro business already cut its dividend entirely. The final punch was Standard & Poor’s credit-rating downgrade to BBB-, with an expectation to eventually bring the rating all the way to junk status. (Not that Cramer puts much stock in ratings agencies these days. But hey, junk is junk.)

With the outlook so grim for both Kimco and Prologis, Cramer put these companies in the Sell Block.



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