I keep seeing stories about how folks who were burned by the market collapse this year are now true believers in dividends, a cycle that tends to happen every time there’s market volatility. Get scared a little, and suddenly a check in your mailbox sounds better than a story about future riches.

So we’ll see more dividend stocks and income investments pitched at times when the market is a little scary, assuming we don’t go on another blistering “growth” run and surprise everybody… but this particular ad caught my eye because of the insanely high dividend payout that Bryan Perry promises — so let’s take a look. The ad I’m digging into today is for Bryan Perry’s Cash Machine newsletter ($77/yr), which has always focused on high-dividend stocks (back before the 2008 crash, it was called the 25% Cash Machine… not an income goal that was easy to hit — he now says the “high yield” part of his portfolio averages about 9-10% income).

Here’s how he starts the story:

“I’m sending you this special message to tell you about a little-known income investment my readers and I have purchased that pays an astounding 30.25% annual yield.

“YES – you read that right – 30.25%!

“And if you enroll in the next 48 hours, you’ll be able to cash in.”

And he implies the dividend is regular, not just a one-time payout…

“… investors who got into this little-known security when I recommended it in January 2022, have already collected 3 of these huge dividend payouts. And they are smiling all the way to the bank.”

Perry also says that the “smart money” is in this stock already, which makes it sound like it’s not so dangerous…

“… this is where Wall Street’s most profitable hedge funds, mutual funds, and investment banks invest their cash to boost their total returns.

“And all they are doing — I repeat, all they are doing — is parking their money in this enormous, yet completely overlooked income-investing dream.

“I can’t figure out why everybody isn’t in this dividend machine.”

And we get some other clues about this secret mega-yield stock:

“The company behind it us a $92 Billion international energy giant, found in 25 different countries.

“aIt’s one of the world’s largest oil and gas producers…

“…that’s making money hand-over-fist the last two years, pulling down a robust 62.63% in share price gains alone!”

We also get a nice little stock chart to illustrate that return, so the Thinkolator will have something to use in confirming our answer. Apparently, this stock was around $14 on August 1, and dipped as low as about $11 in recent months (roughly where it started the year).

Other clues? Sales growth of 81.5% year over year. Returns 68.5% of its profits to shareholders in the form of that dividend. And as of March, the largest shareholders were GQG Partners, with about a 5.22% stake, and he lists the other major institutional shareholders, and the mutual funds who own the shares (not so many of them, interestingly enough — no mutual fund owns more than 1% or so of the shares, and Fidelity and Blackrock each also own less than 1%, which means it must not be in any large indexes).

One final bit of hype for you….

“This Is the Easiest 30.25% You’ll Ever Make on Your Money

“That’s why GOG partners own 194 million shares.

“Why Goldman Sachs has 62.8 million shares.

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“Why Lazard Emerging Markets controls 35 million shares.

“And why many other BIG NAME Wall Street insiders are ALL IN in on this deal.

“They know precisely how this dividend is earned, and they have hundreds of millions invested, knowing their funds are secure.”

He meant GQG Partners, but we get the idea — that’s an asset management firm which also runs a mutual fund for Goldman Sachs (Goldman Sachs GQG Partners Int’l. Opportunities (GSIMX)), they are mostly focused on foreign large cap growth companies, what they call “quality growth.” In case you’re curious, they have well-outperformed their index since inception (about five years ago), but still trail the S&P 500 — picking foreign stocks has not been a particularly happy job for the past five years, with US stocks wildly outperforming much of their competitors. I don’t know much else about them, but Morningstar gives the fund a thumbs-up, and they are genuinely stock pickers, not just indexers or quants.

So what’s the stock? This is a blast from the past, it’s good ol’ Petrobras (PBR), the state-controlled oil company in Brazil. And yes, they just announced a big ol’ dividend for this quarter a few days ago, they’ll be paying out $2.59 per share to shareholders who buy the stock by August 11 (August 12 is the ex-dividend day — “ex-dividend” means “without dividend” that’s the day that it starts trading without the right to receive that next dividend). With a share price of only $15.26 (it was about $14 when the dividend was announced last week), that’s a high yield — that would be a 17% yield even if there are no more dividend payments this year. If they were to annualize that payment and pay that much for three more quarters, that would be a yield of almost 70%.

That’s ridiculous, of course, so the fact that the current payout annualizes to 70% tells you that shareholders don’t think there’s any chance that the dividend will stay this high. That, or they have other reasons to be very worried about owning the stock. Big, steadier US oil companies that people are more confident in, like ExxonMobil (XOM) or Chevron (CVX), have dividend yields of about 4% these days… and many of the big state-controlled companies like Aramco and Equinor (EQNR) have even lower yields (though Aramco paid a special dividend last year).

Petrobras has paid meaningful and rising dividends for five quarters in a row now, before that the dividends were a little more sporadic (and much smaller — and they paid no dividend at all during the lean years after the 2014 drop in oil prices), but the past four payouts before this one were $1.40, $1.17, $1.14 and $0.61. That’s pretty close to a trailing 30% yield, so Perry is not making that up.

Will Petrobras keep paying high dividends? I would not compare it to a CD, like Perry does, there’s certainly no promise or guarantee here… but they might, particularly if oil prices remain fairly high. The positive indicator for dividends is that Petrobras has committed to distribute at least 60% of its cash flow to investors… the negative indicator, beyond the unknowable nature of oil prices in the future, is that this quarter they paid out a lot more in dividends than they had in actual earnings, which might mean they’re spreading the wealth with windfall payouts after some asset sales, or holding back on capital investment, so they might be prioritizing rewarding shareholders right now over setting up a steady foundation for future earnings.

And the wild card? It seems that they are paying out these very high dividends right now, in large part, because the government wants the money. The government of Brazil directly owns 54% of Petrobras shares, with another 10% or so controlled indirectly through government banks and their sovereign wealth fund, so the government’s near-term spending power is boosted if Petrobras pays out a very high dividend on those shares. With an election coming up and the federal budget presumably clobbered by COVID-19 over the past couple years, the government asked state-owned companies to increase dividends, to help the government spend more (whether to help the people or to “buy” votes depends on your perspective, no doubt).

Will the outcome of the election have a big impact on Petrobras’ strategic decision-making and their dividend declarations in the future? Probably, though I can’t say I have any idea how the vote will go, or whether current president Bolsonaro is better for Petrobras than challenger (and former president) Lula. It’s not as though Petrobras is the whole economy, or controls the government’s ability to spend (Brazil’s federal budget is about a trillion dollars, the cash dividend to the government over the past year or so would have been “only” about $13 billion before this latest, higher dividend), but it can be both a political punching bag, as when the government wants gas prices to be lower, and, as is argued by Bolsonaro’s critics right now, a well-timed gusher of extra cash for spending priorities during an election season. If the government pushes both to lower gas prices for citizens (and voters), and to extract more capital from the state-controlled oil company, you can see how that might lead to some challenges within the Petrobras C-suite as they try to prepare for the future. Petrobras has essentially always been in this kind of push-pull situation with its controlling shareholder — sometimes it works out great for shareholders, and sometimes it doesn’t.

For a bit of context, here’s how Petrobras has done over the past 20 years, on a total return basis, versus a few other oil companies — that’s PBR in purple. Equinor (EQNR, blue) is also state-controlled (by Norway), ExxonMobil (XOM, orange) and Chevron (CVX, green) are both active throughout the Americas, and YPF (YPF, pink) is probably the closest comparable in the immediate neighborhood, they’re effectively the state oil company of Argentina (though they didn’t have massive offshore discoveries like Petrobras did 115 years ago). You can see the huge offshore discoveries in PBR’s share price in 2006 and 2007.

More recently, though? It hasn’t been as dramatic for PBR on a relative basis — in large part because of challenges in Brazil’s economy, forced divestment and investment, and scandal, let alone the relatively weak oil prices before the Russian invasion of Ukraine. Here’s the relative performance of those same stocks for the past ten years, including the 2014 drop in oil prices.

In the short term, it’s been pretty solid — over the past year, PBR has held its own with those other oil majors, with only YPF falling apart as Argentina’s challenges seem to at least make Brazil look pretty good. That recent strength may be in large part due to the dividend, but the shape of that chart shows you that most of these companies, for obvious reasons, trade up and down based on the current price of oil — this is the past year, with a that brown line added in to represent the WTI crude spot price.

What’s going to happen next?

Um, I was hoping that if I put a bunch of charts in here at the end… you wouldn’t ask that question.

My guess? the dividend goes down pretty sharply from here, but the next administration in Brazil will probably want to see dividends remain pretty high, so they will likely at least stand by their 60% commitment. Free cash flow was running around $15 billion a year pre-pandemic, so if we end up seeing oil prices and Petrobras operations returning to something like that “normal” level, that would mean $9 billion for dividends. With 6.5 billion shares outstanding, that’s about $1.40 in dividend capacity per share, per year. Not bad, that’s still close to a 10% yield at today’s share price (the stock popped up about $15 today), but a far cry from the $6.30 (42% yield) that PBR will have paid out in dividends over the past four quarters (including next week’s huge $2.59 payout).

If, alternatively, higher oil prices stick and Petrobras can sustain the recent extremely high levels of free cash flow, it could remain higher — over the past year, Petrobras reported $37 billion in free cash flow. 60% of that would be $22.2 billion, which could justify a dividend payment of about $3.40 per year (which would be roughly a 22% yield right now). It looks pretty clear to me that Petrobras is overpaying its dividend right now, presumably for political reasons… but if oil prices remain fairly high, they can probably continue to pay an unusually high dividend, even if it’s maybe half of the current payout. Whether or not they decide to, well, that’s probably a question best asked of either Jair Bolsonaro or Luiz Inácio Lula da Silva, after the October election.

So… do you like the income potential from this high-yield state-run oil company? Think the politics has scared away too many other investors and made it appealing? Or does the politics scare you away, too? No judgement either way from me, I’m not personally interested in investing here but have owned Petrobras in the past… but I’m curious what Gumshoe readers are thinking. Just use our friendly little comment box below to share those thoughts, and maybe we can all continue to learn from each other.