Bermuda-based Nordic American Tanker (NYSE: NAT) has long been a standout performer in the oil tanker business, offering a transparent balance sheet, straightforward operating model, and best of all, fat dividends. While Nordic American deserves its high marks within the sector, it is long-time shareholders who have funded the company's success, and they've taken more than a few blows along the way.

Now, I recognize that despite the preceding statement, tanker stocks tend to have a dedicated following among investors, and why not? Nordic American sports a 14.4% five-year average annual dividend yield; for competitor Frontline (NYSE: FRO), that number is an even more impressive 23.8%. Meanwhile, one analyst projects that shipper Teekay Corporation 's ship-owning subsidiary Teekay Tankers (NYSE: TNK) will offer a 19% yield over the next four quarters starting with the just-completed fourth quarter. Wouldn't such payouts make anyone with half a brain high-tail it out of landlubbing dividend payers like Pfizer (NYSE: PFE) and Altria Group (NYSE: MO), considering their comparatively meek 7.0% and 8.4% yields?

As explanation, we can rather quickly cite the market-based volatility in tanker companies' shares: The one-year stock price charts reveal several hundred percent upswings and halvings. Buy in at the wrong time and it could take years of dividends just to break even on your original investment. But in the case of Nordic American, market volatility is only half of the downside.

Dishing it out -- new shares, that is
Admittedly, the worrisome characteristic to which I refer doesn't exactly jump right out at you. An initial clue, however, is the highly visible but sometimes overlooked payout ratio, a metric that expresses the dividends paid out as a percentage of total earnings. For NAT, that number is a whopping 198%. Basically, the company hands over to shareholders all its earnings, then, in order to distribute even more greenbacks, finances an amount equal to 98% of earnings!

But wait a minute. Nordic is currently debt free. How did management pay down the debt that it continually draws on for dividend support?

Answer: shares, shares, shares. Going back to October 2004, Nordic has issued stock every single year for a total of six offerings. In company statements, offering proceeds are said to be used for some combination of debt repayment and new tanker purchases. Average shareholder dilution per offering amounts to a very unfriendly 22.9%.

Granted, compared to taking on debt, share offerings can be a cheap and predictable source of strategic funding. Over time, however, investors should look for a return of value that at least matches, and ideally exceeds, the rate of shareholder dilution. To assess Nordic's performance in this area, we can compare yearly dilution to change in earnings per share and dividend payout.

Year

2004

2005

2006

2007

2008*

Share Dilution

30.0%

27.4%

54.1%

11.4%

14.7%

EPS change

40.1%

(25.2%)

3.6% Continued...