The high dividend yield is a very appealing incentive for a company to offer to its investors. But, as many investors learn the hard way, a high yield is not always the reflection of a company’s growth and decent future prospects.
Still, some investors might be too enchanted by the high yield that they don’t see the full picture and end up with lousy stocks.
Two such stocks are Frontera Energy (TSX:FEC) and Peyto Exploration and Development (TSX:PEY).
Largest independent oil and gas company in Latin America
Frontera prides itself on being the largest independent oil and gas company in four major Latin American countries: Colombia, Ecuador, Peru, and Guyana.
It has a portfolio of about 43 exploration and production blocks in the four countries combined. But this diversity and dominated position in relatively untapped markets haven’t helped Frontera find adequate profitability.
Currently, the company has a market value of $8.64 per share, which, even with dividends adjusted, is the result of a massive 63.5% decline.
This equates to a negative CAGR of 28.54%. The company has a beta of negative 0.24 and a quarterly revenue loss of 24.2%. It’s operating at a margin of 4.72% and has a profit margin of merely 8.3%.
A lot of the company’s numbers are in red. One area where the company shines is its dividend yield of 9.52%, which might tempt unwary investors.
But the way the company is moving, the chances of its payouts getting slashed are relatively high. Another thing about Frontera is that it has less than 1% institutional holdings, which could indicate that most insiders have already jumped ship.
Explorer and producer of unconventional natural gas
The best thing about hitting rock bottom is that you can only go up from there. It’s a very motivational adage, but it doesn’t work for stocks, especially when a stock takes its sweet time going down the hill and never climbs back up for any considerable stretch. The same is true with Peyto’s stock. This $461 million market cap company has almost three times as much debt.
Even as a dividend payer with an apparently very juicy yield of over 9%, the company has slashed its dividends twice in the past five years. It fell from $0.1100 per share per month to $0.06 per share and finally to $0.02 per share. That’s an impressive decline, to say the least, almost 80%.
But things get even grim if we look at the market value. It’s almost 90% down in the past five years, currently trading at a pittance compared to its former glory, at $2.8 per share.
Foolish takeaway
Even though both companies have unique and dominant positions in the sector in which the companies are operating, things aren’t really going well for the stocks. This makes Peyto and Frontera two lousy places in which to put your hard-earned money.
