No question crosses my email more than the following question (or some variant): Where can I find safe high-yield dividend income?
In July 2012, I thought I had found safe high-yield dividend income in Medallion Financial (NASDAQ: MFIN). The company’s modus was lending on the safest, if not the perfect, collateral: taxi medallions. The economics behind taxi medallions were an undeniable draw.
In many large cities, a taxi medallion – an aluminum plate on the hood of the cab – bestows to the bearer the right to pick up rides for hire. Taxi medallions were exceptional because they conferred oligopoly privileges to their owners. You could say that taxi medallions were as good as gold. In fact, they were better than gold. Taxi medallions had appreciated 1,050% from 1980 through mid-2012; gold had appreciated 205% over the same 32 years.
What’s more, the medallion price trajectory had moved in only one direction: up. And not for just for years, but for decades.
New York City, by far the largest medallion market, introduced medallions in 1937. The initial cost was $10. When the New York system was created, 13,585 medallions were issued. In 2012, the number had dropped to 13,237 (outstanding). Over the previous 70 years, the New York City population had grown by a million.
By 2012, taxi medallions were exchanging hands for $1.2 million apiece.
The Allure of Medallion Financial
How could I not recommend Medallion Financial? It was the largest taxi-medallion financing specialist in the country. What’s more, the opportunity to manufacture more interest income lending on medallions loomed large.
New York City had just approved the auction of an additional 2,000 medallions.
More taxi medallions would normally drop medallion prices, but the New York Taxi Workers Alliance, which represented 15,000 drivers, had petitioned the New York City government to increase fares by 15%. The increased cash flow that medallions would generate would offset the supply increase.
More cash per medallion and a likely increase in medallion prices pointed to Medallion Financial receiving more interest income and paying of the income as dividends. At the time, Medallion Financial was already paying a high-yield dividend at $0.84 per share. This produced a 7.8% yield on my $10.75 recommended entry price for High Yield Wealth readers.
Medallion Financial performed as I expected. Earnings and dividends did indeed rise, and so did the share price. New York City taxi medallions prices trend higher as well, hitting $1.3 million per medallion in 2013. All was good.
That is, all was good until 2014. The danger that lurked in the background had moved to the foreground.
Try as New York City officials might to hold rider-sharing apps Uber and Lyft at bay, they couldn’t. The perfect asset was looking decidedly imperfect in the new competitive environment.
Medallion price appreciation stagnated and was showing signs of rolling over. The same was true of Medallion Financial’s share price. Medallion Financial shares would peak at $17.75 in November 2013, and then they would begin to trend lower with the new trend in medallion prices.
Being hopelessly behind the tech curve, I was slow to acknowledge the danger Uber and Lyft presented. Such is the scourge of anchoring expectations too deeply in the past. But acknowledge, I did. I recommended High Yield Wealth readers sell Medallion Financial shares in June 2014. The share price was higher than the entry price, but not as high as the November 2013 high. Best to lock in the profit we have then to wait and try to lock in the profit we’ll never see.
Vigilance and High-Yield Dividend Income
Today, you can find a New York taxi medallion listed for $400,000; you can find Medallion Financial’s share price listed for $2.25. Medallion Financial’s yield remains high, at 8.9%, but the annual payment has been reduced to $0.20 per share. Both – taxi medallion prices and Medallion Financial’s share price – are likely to trend lower.
The price of liberty is eternal vigilance, so someone in the 1700s said. Eternal vigilance is also the price of a maintaining a portfolio composed of high-yield dividend stocks.
So, where can you find a safe high-yield dividend investment? You can’t. No dividend stock, high yield or otherwise, is ever really safe.