[ad#Google Adsense 336×280-IA]This week, several readers asked me to take a look at the dividend safety of SandRidge Mississippian Trust I (NYSE: SDT), a gas and oil royalty trust that pays a huge 19.5% dividend yield.

A royalty trust is different from most businesses. It doesn’t have equipment, debt, salespeople, etc.

All it does is invest in income-producing assets and collect royalties on those assets.

So far, it sounds pretty good. A company with a huge yield and very few moving parts.

But how safe is that 19.5% dividend?

About as safe as a drunk 16-year-old behind the wheel of a Ferrari, having an argument with his girlfriend via text message.

In other words, it’s not safe.

Hey, That’s the Wrong Way!

The company has investments in 161 wells, all of which are now drilled. However, quarterly royalty income is at its lowest level in the company’s history.

And since the company has no untapped wells, production is unlikely to increase.

The company has to pay out all of its distributable income back to shareholders. So with revenue falling, it should be no surprise that the company’s quarterly dividend payout is also going in the wrong direction.

Since SandRidge pays out virtually all of its income to shareholders, except for some held back for expenses, it’s a different situation from most companies that we look at. When we study most other companies, we determine whether the companies’ payout ratios have enough wiggle room to fund or raise the dividend

In this case, because there are so few expenses, it all comes down to how much production SandRidge gets out of the wells it invested in.

Considering it will be tough to increase production from already producing wells, and the company has no more wells left to drill, that alone makes the likelihood of another dividend cut in the next year extremely high.

Combine that with a history of dividend cuts in nearly every quarter in the company’s short history, and it’s almost a given that its dividend is going to be cut further.

If there were a grade lower than F, I’d give it to SandRidge Mississippian Trust I (NYSE: SDT). But F is as low as I can go.

Dividend Safety Rating: F

— Marc Lichtenfeld


Source: Wealthy Retirement