Dividend Stocks ( General Discussions )

[winston]

A "Strong Buy" Since 1935 by Martin Denholm, The Smart Profits Report

Editor's Note: On Monday, our colleagues at Mt. Vernon Research made another strong case for owning dividend payers... especially right now. Below, please find the full article, including a balanced look at the pros and cons of dividend investing.

Fear and greed dominate the stock market. While they're always prevalent, they become magnified in times of great stress - like now. Smart investors know better than to base their investment decisions on emotions like these.

When it comes to investing, the ability to play solid defense can ease you through turbulent times much better than most ordinary investors.

And the concept here is simple: Defensive investing means having some strong, dividend-paying companies in your portfolio. Forget running to cash as a "last resort" because of negative market performance.

Instead, it's better to look for long-term drivers - like earnings growth, cash and the ability of companies to pay dividends to their shareholders. In fact, history shows us that this is a particularly smart way to go. From 1935 to 2007, more than 40% of the S&P 500's total return came from reinvested dividends.

The beauty of dividend-yielding stocks is that they work well in both rising and falling markets. During the bull market of 1982 to 2000, dividend stocks actually outperformed non-dividend payers by a considerable margin, despite the underlying share price appreciation.

And in volatile, sinking markets like we're experiencing now, it's comforting to know that you still have a source of income throughout the madness. You're essentially being paid for your patience, rather than selling off like everyone else. Let's take a look at some of the other benefits of dividend-paying assets.

A Balanced Look at Dividends

The benefits of owning a dividend-paying company are numerous. Here are three that we feel are most important:

Lower Your Average Cost: When you're receiving a regular dividend payment, and reinvesting those shares, over time it reduces the price you originally paid. It's essentially like buying a house, then renting it out to offset the payment and pick up income, while the underlying asset appreciates at the same time.

Stability During Downturns: When the broader stock market is under pressure and share prices are falling, stocks that pay dividends are often considered one of the "safer haven" investments, since investors are still receiving income. In turn, it's good PR for a company, with the stock attracting more investors and the share price potentially rising as a result.

Get Management on Your Side: When a company is regularly distributing money back to its shareholders, it requires management's discipline and long-term planning to keep that outflow consistent. Knowing that dividend payments must be met reduces the chances that they'll fritter your money away. If they pay out too much, or invest in risky projects, they risk impacting their ability to pay a dividend. In many ways it can be the ultimate "check" on a management's work.

Of course, there are pitfalls, too. Here are three things to look out for:

Beware Dividend Reductions: If a company reduces or suspends its dividend payments, it's usually done as a last resort. Management recognizes that changing dividends results in an immediate negative reaction from shareholders. It could signal that the company is having trouble raising cash, or that the business is making less money.

Consider Tax Implications: Naturally, the IRS wants to take its piece of the pie - and when it comes to dividends, it's a double-whammy. First, it claims the regular corporation taxes from the company. Then, when the company passes what's left down to its shareholders, those investors are then taxed on what they receive. In addition, the Jobs Growth and Tax Relief Reconciliation Act - which lowered the tax rate on dividends - expires in 2010, so we may see dividend taxes rise when it does.

Question Growth Ability: Some argue that while companies should be praised for rewarding shareholders through dividends, it may also mean that it can't find other investment options or projects. Generally larger companies return part of their profits in dividends when their growth slows.

Ultimately, dividend-paying companies need to be thoroughly researched, like any investment. But adding them to your portfolio could be just the answer to defending your bottom line.

[winston]

How to Get 75% Returns from a Dividend Squeeze By Tom Dyson

My professor placed his marker's cap against the whiteboard and pressed it so hard with the butt of his eraser, the cap fired into the ceiling...

"This is what happens to share prices," he told the class, "when dividends rise and yields fall at the same time."

I used to work for Salomon Smith Barney, in the London office. I calculated the profits for a group of traders on a bond trading desk.

After I'd calculated the daily profit and got each trader to sign off on my numbers, I reported the daily results to management. Then at the end of every month, we'd tie all the results together and build them into the financial statements for the London office. A sloppy job would catch the attention of regulators. A cohort of auditors thumbing through paperwork on the trading floor was the last thing Salomon was looking for.

So Salomon wanted us all to be experts in accounting. The company sent us to accountancy school three nights a week. Everyone in my class came from major investment banks, hedge funds, and British industrial companies. We all worked 10-hour days for our firms and then took the Tube across London to spend another three hours discussing financial reporting standards in front of an overhead projector.

It was hell to stay awake. And the teachers knew it. So they'd make extra effort to keep our attention. One teacher, Professor Howard, loved to use physical demonstrations to explain things. One time, he passed money around the classroom to explain credits and debits... Another time, he made us act out a corporate board meeting to see if a merger was going to work. To show what happens when a stock's dividend payment rises while its dividend yield falls, he fired his pen's cap into the ceiling.

The master limited partnership (MLP) sector is a perfect illustration of Howard's point...

Right now, the Alerian MLP Index trades at 205 and pays 21.6 in dividends per year... for an annual dividend yield of 10.5%.

The MLP Index has paid larger and larger distributions each year since 1996. This year, the sector is booming. Distributions from MLPs have risen almost 20% in the last 12 months. I think the boom in MLPs will continue, but to be prudent, let's assume dividends grow at only 10% per year for the next three years.

What about the dividend yield? Since 1996, the dividend yield on the MLP Index has fluctuated between 5% in times of optimism and 13% in times of pessimism. Right now, it's at 10.5%... indicating investors are pessimistic toward the MLP sector.

Dividend yields swing like pendulums. They swing from overvaluation to undervaluation and back to overvaluation in multiyear cycles. In the end, they always revert back to normal levels. Sooner or later, the MLP Index's dividend yield will revert back to normal levels... say, around 8%.

So let's assume this recession blows over, investors stop panicking, and dividend yields in the MLP sector return to 8% in three years.

With 10% annual dividend growth, annual dividends on the MLP Index will increase to 29 per year. A dividend payment of 29 and a dividend yield of 8% together mean the MLP Index will reach 362... an increase of 77% from today's level.

Now that was a lot of numbers, but the idea is simple: When dividend payments increase (as they will in the MLP sector) while dividend yields fall back to "normal" levels, share prices go nuts. I call it a "dividend squeeze."

This phenomenon works with any security that raises dividends every year for many years in a row. To make huge gains, buy when the dividend yield is near the top of its historical range and wait for it to decline to average levels.

If you can find a company or an industry headed for a dividend squeeze, you need to jump in with both feet. The squeeze should send your stock through the ceiling.

[winston]

Shelter From the Storm By Andrew M. Gordon

When the clock-radio woke me up the other morning, the first thing I heard was the results of a survey on what people least want to give up during these hard times. The three winners were tobacco, alcohol, and chocolate.

The survey didn't ask people what they are most willing to give up. If it had, I bet the stock market would have made the top three. Many investors have backed away from the turbulence of a market that is up 700 points one day and down 400 points the next (or vice versa).

Perhaps they're not aware of a special group of companies that can offer them shelter from this storm. Companies that can give them steady and/or rising paychecks even in a rollicking market.

These companies give their shareholders dividend payments. The trick is to invest in big, solid, and growing companies or companies that do very well in a recession. The companies that do both, like giant cigarette-maker Altria (MO) - Marlboro is its best-known brand - are your best bet. These companies aren't guaranteed to go up month after month. They may even have some down years. But as long as you keep holding on to their stock, you'll have no actual losses... and you still get those checks in the mail. Right now, for example, Altria is offering a 6.9 percent yield to investors. That's more than twice what you could get with any savings account.

[kennynah]

the funny thing about yield investing is this.... it is really not so funny....

a high yield, when actual dividends is not raised, can ONLY occur, when price of that equity drops. isn't this mathematically a fact?

so, suppose, i bought into a 1000 shares of stock at $1, investing $1000 and it pays an annual dividend of $60 per lot (1000 shares), this yields 6%. now supposing, the share price drops to $0.50 while maintaining a $60 per annum dividend payout. magically, my dividend yield doubles to 12%...this represents a 100% increase in dividend yield (from 6% to 12%). isn't this just so wonderful? i think not !!!!

i continue to receive only $60 annually from the company that i parted $1000 into, that is now worth $500.... oh no siree.... this is not funny at all....

in fact, should i Long a stock, i would rather that my annual dividend yield drops over a period of time, which must suggest that my stock price has appreciated (assuming that dividend payout remains constant)...and not to hope that annual yield will become higher...unless, the company increases actual dividend payout...

i could never understand yield play...pray...show me an angle that i am missing here...

[kennynah]

to expand this discussion on yield....

i use the concept of BUY - WRITE

this is a situation, where one Long a stock position and Write a Call option.

doing this, gives the trader/investor, a "yield" via the premium obtained from Writing that Call option. does this make the Long stock position any less exposed to downside risks? absolutely NOT ! it merely cushions the downswing in price up to the actual premium received and no more.

eg. Long 1000 shares @ $1 (outward $1000 investment) and Write 10 contracts of Call option @5cents (receives $50 of premium). this means that if share price drops to $950, this investor/trader is NOT losing money as yet. BUT if the share price drops below $950, losses will begin to accumulate....

therefore, arguing in the same vein, a dividend payout, merely cushions the drop in share price up to a certain point (equivalent to the actual dividend received) and no more...

yield play is NO substitute for a hedge, nor should it be used as an investment strategy. any investment/trading strategy strives to achieve ONE and ONE thing only....profits !!! Dividends do NOT generate profits. If it does, the companies that pay out dividends will soon bankrupt !!!

[winston]

Theoretically speaking, yield plays should not have their share prices all over the place..

As long as the business model is "stable", the dividends payout should also be quite stable, hence it's share price should also be quite stable. And if the share price is down a lot on no change in fundamentals, then it may be the time to buy

Example: Utilities

Another concern:-
In an extended bear market, the problem with yield plays is that, after it has gone ex-dividend, the share price does not really bounce back for a while. It's only on the next Dividend Announcement that it would move up again. It could be along wait until the next dividend announcement ..

[kennynah]

of cos, dividend yield is NOT without its usefulness....(besides using it to buy that iPod, sexy lingerie, viagra, etc).... the astute investor will use part of this yield to purchase Puts to protect the Long stock position...oopppsss...i think macam like no Options on Singpost.... too bad...sorry...

but if there were options....

BUY - WRITE and Long Put will be a safer proposition....otherwise known as a Collar...

[Rontan]

Pls allow me to share my humble view on yield investing, using Singpost as an example. Agreed with Kennynah that when share price drop, the yield increases which of course doesn't really benefit the investor at all. That is why it is important to buy the right counter for yield investing. Share price fluctuates for a variety of reasons, but in the short term, it usually react according to market sentiment, and it usually over correct in such cases. Singpost was trading at more than $1.30 during the last bull run, and it went all the way down to about $0.6 plus cents. That is a drop of more than 50%. Did Singpost sales or profit deteriorates by 50% over that time? Obviously no. Will Singpost price appreciate back to $1.3 in future, not sure, but chances are there if one can hold it long enough.

So, the gist is this. Say one buy at $1 and enjoy a 6% yield. After that, the share price drop to $0.7 and the investor suffered a 30% captial loss, on paper that is. The investor hold on to the share and continues to enjoy the 6% returns based on the original purchase price. It may takes a long time before the share price can appreciate back to the original purchase price, but all this time, while waiting, the investor is still paid 6% every year. This is something like long term fixed deposit but the yield is still much better, although the risk is also higher. I beleive this idea has been echo by many already.

And talking about risk, I guess the risk is that Singpost will go bankrupt or faced intense competition that might change the operating landscape completely. Personally, I think bankruptcy risk is quite remote for Singpost. As for intense competition, this might happens, but won't happen so fast. It take times for a competitor to break into Singpost turf which they have been protecting for so long. It is as difficult as, personally opinion only, for a new party to take power over from our PAP govt.

There is another risk that Singpost might reduce their dividends payout, and thus reduce the overall returns. However, looking at the past records, they have been quite consistent and I believe the trend should continue for the foreseeable future.

Of course, anything can happen in the long term. putting money in fixed deposit used to be risk free, but now even world renowned bank can go under, so nothing is guarentee.

But I admit that it is really a boring counter to hold, which maybe good for a simple man like me, with a simple mind and simple way to invest. Less stress la.

[ucypmas]

Theoretically speaking, yield plays should not have their share prices all over the place..

There's a lot of things on the stock market whose prices have been all over the place this past year. The underlying economic value of a firm have always been a poor indicator of their future price performance.

[winston]

The Dividends That Don't Stop By Andrew M. Gordon

Getting steady income from dividend-paying stocks is getting harder. During the entire year of 2007, only seven companies in the S&P 500 cut their dividends, and only three did away with them entirely. 2008 was a different story. 39 companies cut their dividends, and 22 suspended them. 2009 promises to be just as bad.

That means you have to be careful to pick dividend-paying companies that have the best chance of continuing to give you at least the same amount of money as they've given previously. So...

Don't fall for the highest dividend yields. A high yield doesn't automatically mean the company is in danger of cutting its dividend - but with money so tight, the more cash a company hands out to shareholders, the more difficult it is to keep their generous cash payouts going.

Look for companies with little debt and steady (if not growing) cash flow used to fund their dividends. My own standard is that dividends shouldn't take up more than 80 percent of a company's cash flow for any given quarter.

At finance.yahoo.com, you can look up a company and find its cash flow by clicking on "Key Statistics" or "Cash Flow." "Key Statistics" will give you the company's cash flow in the last 12 months. "Cash Flow" will show you a cash flow chart of the company, either by year or by quarter. You want the quarterly chart. What you're looking for is to make sure there's been no deterioration of cash flow in the last quarter or two.

With the steep drop in today's markets, it's a great feeling to get regular checks from dividend-paying companies. (They can pay you at least twice the interest you'd get from your savings account.) To avoid getting less money (or no money) from the income stocks you buy, simply follow the above two rules.