Just ask the investors in Global Investments ( GIL, the former Babcock & Brown Structured Finance Fund) and Macquarie International Infrastructure Fund Limited (MIIF)
At the IPO price of S$1.06 in late 2006, GIL was offering a yield of 9%, while MIIF’s prospectus in May 2005 stated “forecast dividends delivering an annualised yield of between 7.1% to 9.0% on the Offering Price for the period ending 31 December 2005 (see ‘‘Financial Forecasts — Assumptions’’)”. Its listing price was S$1.
Well GIL (with lots of CDOs in its portfolio) is now around 24 cents, while MIIF is around 43.5 cents.
The saving grace is that both are trading below their latest available NAV calculations. MIIF’s NAV as at Sept is 80 cents down from June’s 86 cents. GIL’s is 36 cents as at September, up from June’s 35 cents.
The moral of these two stocks is that high yields could be a sign that investors need to be compensated for the risk that the dividends are not sustainable and that the stock price would fall. Of course, if one is lucky, it could simply mean that the market got it wrong — the dividends are sustainable and the stock price undervalues the company.
You place yr bets, and leave it to the cards.