Dividend investing is a great way for investors to see a steady
stream of returns on their investments. Though the world of
dividend investing can seem conservative and basic on the surface,
there is a lot to know in the dividend world that can help
investors create long term wealth. Here are 40 things every
dividend investor should know about dividend investing:
1. Dividends = Meaningful Portion of Stock
Going back over the past 80 years, dividends have accounted for
more than 40% of the total returns of the S&P 500. It is
important to note, though, that that has not been a steady or
consistent ratio - capital gains tend to be considerably larger
percentages during bull markets, while dividends make up much
larger portions in weaker markets.
2. Ex-Dividend Dates Are Key
It is very important for investors who want to hold dividend-paying
stocks to pay attention to timing and certain key dates. The
ex-dividend date refers to the first day after a dividend is
declared (the declaration date) that the owner of a stock will not
be entitled to receive the dividend. Prior to the open of trading
on the ex-dividend date, the exchange will mark down the price of
the stock by the amount of the dividend. Those investors wishing to
receive a declared dividend must buy the shares before the
ex-dividend date to receive that dividend.
3. Dividends Come In Various Frequencies
There are really no hard and fast rules (in the United States,
at least), regarding when a company can pay dividends. Tradition
(and expectation) still carries a great deal of weight, though, and
it has become the established norm for most regular corporations to
pay dividends on a quarterly basis. Many well-known dividend-paying
companies like Coca-Cola (
) and Johnson & Johnson (
) pay dividends on a quarterly basis.
What is commonplace in the United States is not necessarily so
elsewhere. In many countries, dividends are declared and paid once
or twice a year. Chinese oil and gas giant Petrochina (
) and British spirits giant Diageo (
) pay twice a year, while Novartis (
) and Siemens (
) each pay annual dividends.
Although it is the norm in North America for companies to pay
dividends quarterly, some companies do pay monthly. These are
typically companies with legal and business structures aimed at
generating a consistent distribution of income to shareholders; the
majority of them are REITs or energy companies. Likewise, many
(particularly those that invest heavily in income-generating assets
like bonds) pay dividends on a monthly basis.
4. ADR Yields Can Be Confusing and Inconsistent
American Depository Receipts (or ADRs) offer investors a chance
to invest in foreign companies. While these are basically simple
instruments that trade like any other stock, they can be a little
confusing and inconsistent when it comes to dividends and the
reported yields on financial information sites.
Some of the trouble comes from how these sites calculate yields.
Some sites will take the most recently-paid dividend and multiply
it by the number of times the company pays a dividend in a year
(typically one or two for most foreign companies). Other sites will
simply use the total dividends paid over the past twelve months.
Likewise, many sites tend to be slow or inconsistent in
incorporating announced changes to, or declarations of,
Currency can also have a meaningful impact on ADR yields. ADR
dividends are typically declared in the operating currency for the
company, but paid to the ADR holders in dollars. How and when a
financial site applies the exchange rate to this conversion can
have a meaningful impact on the reported yield.
It is also important to note that the reported yield of an ADR
is not necessarily what an investor will receive. Many countries
require that companies paying dividends to foreign shareholders
withhold taxes, reducing the dividend. ADR custodians are also
allowed to deduct custody fees (basically, the expenses they charge
for managing and maintaining the ADR) from the dividend, further
reducing the yield. Both foreign withheld taxes and custody fees
are typically deductible for individual tax purposes (at least when
held in taxable accounts).
5. Dividends Are
Not Capital Gains or Income
Dividend income is unusual in that it has typically already been
taxed (corporations pay taxes on the income that they then use to
pay dividends), but that does not shield it from additional
taxation. Prior to the Jobs and Growth Tax Relief Reconciliation
Act of 2003 (the "Bush tax cuts"), stock dividends were generally
taxed at the same rate as an investor's ordinary income.
With these tax cuts, a new category of "qualified dividends" was
created, and those that qualified (which would include most regular
corporate dividend payments) were taxed at a new, lower rate. From
2003 to 2007, qualified dividends were taxed at either 15% or 5%
(if the individual's tax bracket was 10% or 15%). From 2008 to
2012, the tax rates for qualified dividends were 15% or 0% (again
for investors in the 10% or 15% brackets).
It must be noted that depending on the resolution over the
"fiscal cliff" tax rates on dividends might be altered.
6. Payout Ratios Above 100% Are A Red Flag
Dividends are supposed to be a mechanism by which companies
share their financial success with the shareholders. While
dividends do not, strictly speaking, have to come from earnings it
is not sustainable for a company to pay out more than it earns.
Accordingly, it is important for investors to monitor a
company's payout ratio. The payout ratio is simply the ratio of
dividends in a specified period (typically the last twelve months)
divided by the company's reported earnings over the same period.
For simplicity's sake, most dividend payout ratios use the
per-share dividend as the numerator and the earnings per share (
) as the denominator.
If a company has $1 per share in earnings and pays a $0.70 per
share dividend, the payout ratio is 70%. Likewise, if the dividend
were $0.10 the payout ratio would be 10%.
If the same company paid a dividend of $1.20 per share, the
payout ratio would be 120% and investors would do well to ask how
that company could hope to continue a dividend in excess of its
earnings. Companies do try to maintain consistent (or rising)
dividends, even in industries where year-to-year financial
performance can vary. Consequently not all companies with a
dividend payout ratio above 100% are paying an unsustainable
dividend, but no company can indefinitely pay out more in dividends
than it earns.
It is also worth noting, though, that "earnings" (and earnings
per share) are a byproduct of accounting and not strictly real.
Companies actually pay dividends out of the cash flow they
generate, though it is not common to see payout ratios calculated
on the basis of operating or free cash flow.
7. Effective Yield Is Based On Your Adjusted Cost
One of the under-appreciated ways to evaluate dividends is in
the context of the investor's own historical cost basis in the
stock. "Effective yield" is a concept with multiple definitions in
investing, but one definition includes evaluating dividend yield on
the basis of an investor's own cost basis. This analysis helps to
cover the deficiency of information offered by current yield.
Consider the following - a stock currently trades at $50 and
pays a $2 dividend, meaning that the stock has a current yield of
4%. But if an investor bought that stock years before (and the
stock price has increased since then), it's not an accurate
reflection of the yield on the investment. If the investor bought
the stock at $35, the current yield on that cost basis (what we're
calling the effective yield here), is actually 5.7% ($2 divided by
8. Current Yield Is Based On Different
Current yield is a relatively common concept in dividend
investing. The current yield is simply the dividends paid per share
divided by the price per share. If a company pays a $1 per share
dividend and the stock price is $100, the current yield is 1%.
Yet not all sources calculate and report current yield the same
way. While most sites report yield on the basis of four times the
most recently paid or declared dividend, some pay on the basis of
the dividends paid over the past 12 months.
Consider the following to see the difference - if the company in
the prior example announced that it was increasing its dividend by
15% (to $1.15 per share), some sites would report the yield as 1.2%
(1.115% rounded up), while some would continue to report 1% until
the first payment at the higher rate, at which point the yield
would move up to 1.04% (three quarters of the old $0.25/qtr
dividend + one quarter of the new $0.2875 dividend).
9. Cumulative Dividends: Declared, Not Yet Paid
In some cases, corporations issue preferred stock that carries a
right whereby any unpaid preferred dividends accumulate and must be
fully paid before certain other payments (like common stock
dividends) can be made. Unpaid dividends accumulate and this type
of preferred stock is called "cumulative preferred."
This is not to be confused with a stock that is trading
"cum-dividend," which refers to a stock where a dividend has been
declared and current buyers are entitled to that dividend
(cum-dividend means "with dividend"). Stocks cease to trade
cum-dividend on their ex-dividend date.
10. Dividend Aristocrats: Exclusive Club
Investors will find many writers and websites that try to use
catchy titles to draw attention to particularly attractive
dividend-paying stocks. One title worth looking out for is
"dividend aristocrat". Standard & Poors ("S&P") defines a
dividend aristocrat as a company that has increased its dividend
for 25 straight years, excluding special dividends.
11. Value Stocks With Dividend Discount Models (
Dividend discount models work on the theory that the only real
value to a shareholder is the dividend stream that a company
produces (academic theory holds that capital gains and variability
in share prices are unpredictable and simply the byproduct of
investors adjusting their expectations for a company's future
stream of dividends). Consequently, a dividend discount model
attempts to project these dividends and discount them to a net
present value per share that represents a fair value for the
Arguably the most accurate way to run such a model is to project
a company's dividends for as many years as possible, calculate a
terminal growth rate, and then discount that back by the
appropriate discount rate. That discount rate should be the cost of
the company's equity, whether determined through the Capital Asset
Pricing Model (CAPM) or some other method.
Some investors try to use a more simplified version of the
This version has the investor use next year's anticipated dividend
(D1), divided by the cost of equity (r) minus the estimated
perpetual growth rate of the dividend (g). As an example, if a
company is projected to pay $1 per share in dividends next year,
the growth rate is projected to be 5%, and the cost of equity is
estimated to be 8%, then the fair value for the stock is
Investors should be cautious when employing a dividend discount
model, particularly the simplified form. In the case of all models,
the output will only be as valuable as the quality of the inputs.
In the case of the simplified form, there are numerous other
problems to consider. The model assumes that a firm's cost of
equity never changes, that the dividend growth rate never changes,
and that the dividend growth rate is less than the cost of the
What's more, while the model is quite simple and requires very
few inputs, the end result is very sensitive to the inputs - a
small difference in the estimated growth rate or discount rate can
result in large differences in the implied value of the equity (in
the above example, changing the growth rate estimate by only 5% (to
5.25%) changes the fair value by 9% (to $36.36).
12. The Power of Re-Investing Dividends
Reinvesting dividends, particularly those paid by companies with
a history of increasing their dividend over time, can be a powerful
avenue to increasing total wealth over time. Although investors
have to pay taxes on reinvested dividends in taxable accounts, that
money nevertheless "stays active" in the stock and accumulates
The following chart illustrates the power of reinvested
dividends. In the example below, a stock is assumed to evenly
appreciate at a 10% rate per share, and increase its dividend by 4%
per year. With an initial starting amount of $10,000, the investor
that reinvested dividends would have $27,489 at the end of the
eight years, while the investor who did not reinvest dividends
would have $21,567 including the collected dividends.
13. Basics of DRIPs (Dividend Reinvestment
Dividend Reinvestment Plans (DRIPs) are investment plans offered
directly by dividend-paying companies. When a shareholder enrolls
in a DRIP, they no longer receive a company's quarterly dividends
as cash, but rather the amount is used to directly purchase more
shares from the company.
Although the investor is still obligated to pay taxes on the
dividend amounts, the investor forgoes brokerage commissions to buy
those shares and can buy fractional shares. In some cases, but not
all, the sponsoring company may give a discount to the share price
on these purchases. In many cases, an investor may choose to
receive a certain percentage or amount of the dividend in cash,
while having the remainder reinvested in shares.
There are some downsides to DRIP plans. In addition to the tax
obligation, investors may find that tracking the cost basis of
their holdings becomes more complicated, as each dividend that is
reinvested changes the cost basis. It is also important to note
that companies are not obligated to offer DRIPs, and not all
Seeing the popularity of DRIPs, may brokerages have begun to
make them available to shareholders. These are not technically true
DRIPs, but rather "synthetic" DRIPs that otherwise mimic the same
features (though without the options to receive part of the
dividend in cash or to acquire shares at a discounted price). There
is often a charge/annual fee tied to participation in brokerage
14. Dividend Capture Strategies
Although investing in dividend-paying stocks and collecting
those quarterly payments is considered consummately conservative
equity investing, there are much more aggressive ways to play
dividend-paying stocks, including dividend capture strategies.
In essence, dividend capture strategies aim to profit from the
fact that stocks do not always trade in strictly logical or
formulaic ways around the dividend dates. For instance, while a
stock is marked down before trading begins on the ex-dividend date
by the amount of the dividend, the stock does not necessarily
maintain that adjustment when actual trading begins (or ends) that
day. Likewise, the desire to reap the benefit of the upcoming
dividend often spurs interest in the stock ahead of the ex-dividend
date, leading to short periods of out-performance.
In its simplest form, dividend capture can involve tracking
those stocks that, for whatever reason, do not generally trade down
by the expected amount on the ex-dividend date. Investors may
notice that although a given company pays a $1 dividend, the stock
only declines by an average of $0.50 on the ex-dividend date. That
being the case, an investor can buy the stock on the day prior to
ex-dividend (say, for $100), sell it on the ex-dividend date (say
for $99.50), and the collect the $1 dividend a few weeks later -
leading to a total return of $0.50 on the trade (losing $0.50 on
the stock, but gaining the $1 dividend).
A few words are in order about this strategy. First, because the
stock is held for less than 61 days, the dividend is not eligible
for the preferential tax treatment that qualified dividends get,
though the capital loss on the stock trade offsets that to some
extent. Second, this analysis does not include trading costs or the
time value of money - if it costs more than $0.50 per share to do
the trade and/or that money could earn more than $0.50 per share in
interest, it makes no sense to do the trade.
There are more involved, longer-term dividend capture strategies
as well. As some stocks do show a tendency to trade higher into the
ex-dividend date, it can be possible to buy the shares ahead of
time (sometimes even 61 days ahead or more, thereby triggering
qualified dividend eligibility) and reap outsized returns by
selling the stock on or before the ex-dividend date. Likewise,
there are strategies involving options that take advantage of
Academic theory would suggest that dividend capture cannot work
- dividend capture is basically a form of arbitrage and market
theory holds that savvy market participants will ensure that any
"easy money" opportunities like this quickly vanish. To that end,
it does seem to be the case that once people start widely
discussing particular dividend capture stocks, those strategies
seem to stop working.
Likewise, this is not a risk-free or cost-free strategy. The
commission charges to get in and get out apply whether you make
money or not, and investors pursuing dividend capture often find
that they must execute the strategy across multiple names to
diversify the risk. That ties up capital, which carries its own
Last and not least, this strategy takes a lot of work. It takes
work to find suitable candidates, it takes an appetite for risk to
pursue the strategy, and it takes discipline and attention to
detail to successfully execute. This is absolutely not a strategy
for the "I'll do it tomorrow" crowd, and quite frankly not all
investors are going to find that the rewards (after subtracting the
costs and those dividend capture attempts that fail) are worth the
15. Companies Can't Fake Dividends
Some investors prefer dividend-paying stocks because dividends
are real and trackable. A company's reported net income or earnings
per share (
) is largely a product of accounting, and may have little or
nothing to do with a company's actual financial health. As a
result, devious executives and skilled accountants can make even a
terrible company look healthy through the lens of earnings and
Dividends are different. Dividends either appear in
shareholders' accounts or they don't - and if they don't, there are
no accounting tricks that explain it. Dividends don't necessarily
have to be paid out of income, but paying dividends creates a paper
trail of cash that is much harder to manipulate.
This is not to say that a company's dividends are an accurate
representation of a company's financial health or liquidity.
Companies can, and have, paid dividends with borrowed money or
sources of funds other than operating cash flow.
16. There's No Free Lunch
Dividends are basically a mechanism for companies to share their
financial success with long-term shareholders, and short-term
investors cannot simply buy and sell around dividend dates to reap
risk-free profit. On the ex-dividend date (the date on and after
which new buyers will not be entitled to the dividend), the price
of the stock is marked down by the amount of the declared dividend.
While shares do not always fully maintain this adjusted value (see
our section on "Dividend Capture"), trading shares around dividend
dates is not a simple alpha-generating strategy.
Dividends May Foreshadow Lower Growth
Some investors regard the initiation of a dividend as a very
mixed blessing for a company. Generally speaking, companies should
retain earnings when management can reinvest that capital into
projects that are expected to generate a return in excess of the
firm's cost of capital. If a company cannot identify enough
projects that meet that minimum return, though, the
shareholder-friendly move to make is to return that capital to
shareholders in the form of dividends (and/or share buybacks).
When companies begin a dividend, and particularly when the
company is a tech company like Microsoft (
), Cisco (
) or Apple (
), some investors regard this as proof that the company can no
longer find attractive avenues to growth.
Although this analysis contains an element of truth, it is in
many cases exaggerated. Spending retained earnings on R&D does
not guarantee future results, and there is not always (or even
often) a direct relationship between the money invested in new a
project and its future returns. Take the case of the Apple iPhone -
Apple reportedly spent about $150 million over 30 months to develop
the iPhone, a product that has generated billions in profits.
It does not automatically follow, then, that the next project is
going to require billions of dollars to develop, or that investing
billions into development will somehow "guarantee" a multibillion
dollar product. Consequently, many innovative companies find that
they simply generate more cash than they can effectively redeploy
in their business. That makes returning that cash to shareholders
more desirable than wasting it on inefficient or unfocused R&D
or ill-considered (and over-priced) acquisitions.
It is typically true that a company's fastest growth days are
behind by the time it initiates a dividend. As many dividend-paying
companies like Abbott Labs (
), McDonald's (
), and IBM (
) have amply proven, though, the initiation of a dividend does not
preclude further growth for a company.
18. Dividends Can Protect From Inflation
Owning dividend-paying stocks, particularly those that increase
the dividend regularly, can be a better hedge against inflation
than bonds. The problem with bonds (excluding floating-rate bonds)
is that they pay fixed income streams over the life of the bond -
the dividend payments in Year 20 are the same as Year 1. In periods
of inflation, that means each successive interest payment is worth
less in terms of purchasing power, and it also means that the
purchasing power of the principal amount of the bond (which may not
mature in 10, 20, or 30 years) could erode substantially as
With a dividend-paying stock, investors do not lose to inflation
if the dividend grows as fast as (or faster than) the inflation
rate. According to data collected by Robert Schiller at Yale
University, dividends from the S&P 500 have grown at an annual
rate of 4.2% since 1912, while the consumer price index (the most
commonly accepted proxy for inflation) has risen by 3.3%.
19. Non-Cash Dividends
The vast majority of dividends paid today are paid in cash, but
that has not always been, and still to this day is not always, the
case. Dividends can be paid out in virtually anything of value, and
companies have paid dividends in their own stock, other companies'
stock and with physical goods.
Although it's uncommon now, many companies used to "pay" regular
stock dividends whereby shareholders would get a certain number of
shares for every share they already owned (typically a small
fraction like one share for every 20). The reason pay is in
quotation marks is that stock dividends really aren't dividends in
the traditional sense - they are stock splits and the share price
adjusts accordingly, meaning that shareholders are financially no
better off post-stock dividend.
Some companies have used the dividend mechanism to spin off or
divest holdings in other public companies. Many companies treat
these as special or one-time dividends, not as regularly quarterly
payments to shareholders. In these cases, shareholders receive
actual shares of stock (or warrants or rights) to the other company
as the dividend in proportion to their share ownership of the
In some rare cases, companies have also used physical goods as
dividends - Wrigley's gave shareholders packs of gum every year,
and other companies (particularly in entertainment and dining
businesses) would give coupons or vouchers to shareholders.
Although these have usually been regarded by the issuing companies
as gifts or perks of share ownership, they are technically
Some Tech Companies Can Pay Attractive Dividends
Tech companies are not traditionally major dividend payers, but
that trend has changed as tech companies mature and accumulate more
cash than they can effectively redeploy in growing the
) has paid a dividend since the late 1960s, while Texas Instruments
) has paid one since the early 1970s. Hewlett-Packard (
) began paying a dividend in the early 1990s, and many of the tech
stars of the 1980s and 1990s, including Microsoft (
), Cisco (
), Oracle (
) and Intel (
) have initiated dividends over the past decade.
21. AT&T Is The U.S. Dividend King
Though Apple (
) is by far the largest U.S. stock by market cap, it's far from the
top dividend payer. That title belongs to AT&T (
), which paid out more than $10 billion in dividends last year.
That means AT&T pays out about $19,000 in dividends to its
shareholders each minute.
22. Dividends Can (And Do) Get Cut
Investors need to remember that dividends are a byproduct of the
cash earnings of a business and that if the fortunes of a business
decline, so too can the dividend. Companies as varied as General
Motors, Kodak, and Woolworth all once paid robust dividends, until
their fortunes changed severely (all three companies went bankrupt,
and Woolworth disappeared from the business landscape years
It doesn't even take total devastation to hurt a dividend.
Virtually every U.S. bank that participated in the Troubled Asset
Relief Program (TARP), and almost all U.S. banks were part of the
program, was required to cut its dividend. Many reliable
dividend-paying banks like U.S. Bancorp (
) cut their dividends, and in some cases cut them dramatically.
23. Not All Dividend Payers Are "Stocks"
While dividend-paying stocks capture most of the attention of
equity investors looking for investment income, they are not the
only game in town. Many other financial instruments that trade like
stocks offer investment income to their owners.
Exchange traded funds (ETFs) and exchange traded notes (ETNs)
are often designed to replicate a stock market index, and many of
these stocks pay dividends. Likewise, many ETFs and ETNs invest in
income-generating securities like bonds. Consequently, many of
these ETFs and ETNs pass on these dividends to shareholders.
Master limited partnerships (MLPs) are businesses organized
under special rules that allow them to avoid corporate taxation and
pass on a substantial portion of their income to owners. MLPs are
not technically corporations, they do not issue shares (a share of
an MLP is typically called a "unit"), and they do not pay dividends
(they pay "distributions"), but in many respects owning an MLP is
similar to owning a dividend-paying stock. Investors should note
that the tax treatment of MLP distributions is different than that
for common stock dividends.
Real estate investment trusts (REITs) are special types of
businesses organized in a way to pass on substantial corporate
earnings to unit holders. As the name suggests, these businesses
have to be engaged in real estate operations in some way
(owning/operating buildings or land, owning/trading mortgage bonds,
etc.), and their earnings are free of corporate taxes so long as a
legally-mandated minimum percentage of earnings are distributed to
24. Dividend Tax Rates Have Varied Historically
Dividends are a relatively unusual example of double taxation
within the U.S. tax system. A corporation generally pays dividends
out of income - income that is taxed by the U.S. government. Those
dividends are then once again subject to taxation is held in a
taxable brokerage account.
It has been the case over history, then, that dividend tax rates
have varied and not always in lock-step with ordinary income tax
rates or capital gains tax rates. From 1913 to 1953, dividends were
fully exempt from taxes except for a four-year period (1936-1939)
where they were taxed at the ordinary income tax rate. From 1954 to
1985, a certain portion of annual dividend income was exempt from
taxes ($50 from from '54 to '63, then $100 until 1980, and then the
first $200 of combined dividends and interest income) and the
remainder taxed at regular income tax rates. From 1985 to 2003
dividends were taxed at the recipient's ordinary income tax rate.
From 2003 through 2012 "qualified dividends" were taxed at 15%, or
in some cases 5% or 0% if the recipient was in the two lowest
income tax brackets.
It must be noted that depending on the resolution over the
"fiscal cliff" tax rates on dividends might be affected in 2013 and
25. MLPs Can Offer Attractive Dividends
Master Limited Partnerships (MLPs) are a special type of limited
partnership (a way of organizing/creating a business) that can
trade on public stock exchanges. MLPs are created primarily with
the intent of generating income streams for the partners/unit
holders, so it is not surprisingly that they can be good sources of
MLPs must generate the bulk (90%+) of their income from what the
IRS deems to be "qualifying sources," which typically means
activities related to the production, processing, transportation
and distribution of energy (oil, natural gas, various distillates,
coal, etc.). As partnerships, MLPs do not pay income tax and can
pass on pro-rated shares of their depreciation to unit holders.
MLPs do not technically pay dividends - they pay distributions
and distribute forms called K-1s to investors. The tax treatment of
MLP distributions can be quite complex and will vary from investor
to investor. Consequently, it's not possible to state that MLPs
offer unilaterally better after-tax yields, but for many investors
that is the case.
26. Certain Sectors Are Known For Stable
Within the dividend investing world, certain sectors have earned
a reputation as reliable dividend-payers. In particular, utilities
and telecoms are famous go-to sectors for dividend-paying
companies. Prior to the housing market crash in the United States
and the result recession, banks too were often seen as reliable
Sectors known for being reliable dividend-payers tend to share
certain characteristics. In many cases, the companies face little
or no competition (in many cases enjoying statutory monopolies),
the services/goods they offer are essential or irreplaceable, and
customers use and pay for the service at regular intervals (often
monthly). This allows the companies to generate stable, predictable
cash flow streams that support reliable dividend policies.
27. Tech Companies Are Starting To Boost
Historically speaking, tech has been a land of slim pickings for
dividend investors. As tech companies founded in the 1970s and
1980s have matured, though, suddenly investors have a much more
promising array of dividend-paying investment opportunities in the
There are multiple reasons why investors may want to consider
dividend-paying technology stocks. To begin with, adding
dividend-paying stocks in the tech sector diversifies a dividend
investor's holdings and should reduce the internal correlation of
the portfolio components.
Dividend-paying tech stocks may also offer more growth potential
than dividend investors are commonly used to seeing. While it is
true that many investors regard the initiation of a dividend as a
sign that a company's best growth days are behind it (particularly
in tech), that does not mean that a company will never grow again.
Companies like McDonald's, Coca-Cola and IBM have paid dividends
for decades and continued to grow as a business. This could be
particularly true in the case of technology, where new product
development does not typically require a proportionate reinvestment
of capital (it typically takes less than $1 of reinvested capital
in technology to generate an incremental dollar of capital).
Tech companies could also offer above-average dividend growth
potential. Companies typically initiate dividends at low levels
relative to their payout capability, giving the leeway these
companies have to raise the payout ratio in the future. What's
more, if tech companies can continue to grow faster than the
market, it increases the probability of above-average dividend
28. Don't Be Fooled By Capital Gains
Like mutual funds, ETFs can generate taxable capital gains when
positions are sold at a profit, and like mutual funds, those gains
are passed on the fundholder. While most ETFs are highly
tax-efficient and run themselves in such a way as to minimize
capital gains distributions, it is nevertheless true that ETFs will
periodically distribute these taxable capital gains to
shareholders. These distributions may look like dividends (and can
generally be reinvested) and some financial news sites may
erroneously include them in reported yields, but they are not
dividends - they are capital gains and taxed at an investor's
capital gains rate.
29. The Basics of One-Time Distributions.
While most U.S. companies that pay dividends strive to do so on
a consistent schedule, some companies do pay special one-time
dividends. These payments can serve many purposes; in some cases,
it is a way for a company to share the proceeds of a major asset
sale. In other cases, it may be part of a recapitalization of the
business or a way of disgorging accumulated cash without
effectively obligating the company to a higher ongoing dividend
In some cases, companies can categorize these special one-time
payouts as a "return of capital." In doing so, the distributions
become tax-free to the recipients. It is also worth noting that
companies will turn to special dividends as a way of accelerating
capital return to shareholders before a significant change in tax
policy, as has been seen in the last three months of 2012 ahead of
the anticipated expiration of the favorable 15% tax rate on
) is one recent example of company using a one-time dividend to
distribute the proceeds of an asset sale to shareholders. AOL
management wishes to distribute $1.1 billion in surplus cash to
investors and is choosing to do so through a $600 million
accelerated share repurchase plan and a $5.15 per share special
dividend. Nearly all of this cash was generated by the sale of 800
patents to Microsoft (
) in April of 2012.
30. Companies Can Issue Stock Dividends
Not all dividends have to be paid in cash. Companies can pay
dividends with additional shares of stock (stock dividends). When
companies do this, they are effectively splitting the stock and the
stock's price adjusts accordingly.
31. There's A Long History Of Dividends
The concept of dividends goes back so far that the question of
the first company to pay a dividend is very much an open question.
A French joint stock company, Société des Moulins du Bazacle, may
well have been the first (the company was formed in 1250), and
other companies formed in the 16
century and early 17
century like Muscovy Company and East India Company paid dividends
to their shareholders.
The Hudson Bay Company was the first North American commercial
corporation, and most likely the first to have paid a dividend.
That first dividend (paid 14 years after the company's formation in
1670) was a whopper too - 50% of the par value of the stock.
32. There are Many Dividend Paying Stocks on U.S.
As of the end of November, 2012, Fidelity's database reported
that 2,640 stocks that traded on U.S. exchanges paid a dividend.
Additionally, the number of dividend-paying members of the S&P
500 surpassed 400 in the third quarter of 2012 and stood at the
highest level since 1999, according to ABC News.
Dividend.com is a great resource to keep track of the
definitive information for the vast amount of dividend paying
33. Buffett says "Always Reinvest dividends!"
Famed investor Warren Buffett has come out in the past in favor
of reinvesting dividends. Investors should note, though, that
Buffett generally does not follow his own advice in this regard.
While Buffett will add to his stock positions from time to time, he
does not reinvest his dividends as a matter of course (Berkshire
Hathaway has owned the same number of Coca-Cola shares for more
than 15 years).
34. Dividend Increases: Leading Indicator
Analysts and investors often regard announced dividend increases
as positive predictors of future corporate performance. One of the
biggest reasons behind this is a seemingly unspoken agreement that
dividends are supposed to go up or remain steady, but not decline;
companies that announce lower dividends are typically perceived as
weak/vulnerable, and investors often shun or sell off the stock.
Consequently, corporate boards are typically hesitant to establish
dividends that they are not confident they can maintain; if a
company announces a higher dividend, it often signals to the market
that management believes operating conditions have improved and are
likely to stay at a higher level for the future.
35. Volatility of Dividend-Paying S&P 500 Stocks vs.
An analysis by Ned Davis Research showed that, through August of
2011, the standard deviation of returns for dividend-paying members
of the S&P 500 was 17.1%, while the standard deviation for
non-dividend-paying members was 25.69%.
36. REITs Can Deliver Big Distributions (And Big
Real estate investment trusts (REITs, for short) can be some of
the largest dividend-payers in the stock market, due largely to the
preferential tax treatment a company receives if it elects to
organize as a REIT. Provided that a REIT distributes a certain
percentage of its taxable income (presently 90%) to shareholders,
the company's income is not taxed by the government.
As the name suggests, REITs were originally established for
companies whose primary operations/investments were in real estate,
and the majority of companies in the class do own and/or operate
properties like office builds, apartments, hotels and shopping
malls. While at least 75% of assets must be invested in real estate
and 75% of gross revenue must come from rents or mortgage interest,
there is some flexibility here, and investors can find companies
like timberland operators organized as REITs.
The favorable tax treatment granted to REITs allows for larger
distributions to shareholders, but these investments can be quite
risky. Although real estate has a strong history of performance
relative to inflation, many of the businesses owned/operated by
REITs are economically sensitive - when the economy weakens,
shopping mall traffic declines, office space vacancies increase,
and so on. What's more, most REITs rely heavily upon debt financing
and the combination of lower rents/interest income and persistent
interest payments during recessions can put these companies into
37. Royalty Trusts Can Be Attractive For Dividend
Like REITs and MLPs, royalty trusts are created with the
intention of shielding a business entity's earnings from taxes and
passing the overwhelming majority of those earnings on to the
shareholders as dividends (or, more technically,
The distributions of royalty trusts are usually generated from
businesses related to oil/gas or mining. In most cases, a U.S.
royalty trust will own a particular asset and lease that asset to
operators who produce the oil or other resource and pay a
percentage back to the trust. The trust uses that cash flow to pay
its operating expenses and passes the remainder on to shareholders.
The existence of the mineral asset typically assures some level of
payout, though the dividend can vary considerably over time as the
value of the commodity changes.
Canadian royalty trusts (aka CanRoys) used to be very popular
vehicles for income-oriented investors, until a change in Canadian
law basically did away with their advantaged tax status. There are
U.S. royalty trusts, but the royalty trust structure is not
especially popular. Unlike Canadian royalty trusts, U.S. royalty
trusts are not allowed to acquire additional properties after their
creation. Nevertheless, they are shielded from corporate taxation
so long as they distribute 90% or more of their profits to
shareholders, and there are a handful of U.S. royalty trusts in
38. Good Dividend Stocks Have More Than Just Good
Successful dividend stock investing is more than just selecting
those stocks with the most impressive yields. Dividend.com has
created a system called DARS™ (Dividend Advantage Rating System) to
reflect and evaluate these other critical factors.
- Relative strength is a well-established technical analysis
concept that argues that strong stocks tend to continue
outperforming, while weak stocks tend to continue
underperforming. In DARS™, relative strength assesses where a
stock is relative to its 50-day and 200-day moving averages to
assess whether it is in an uptrend or not.
Overall Yield Attractiveness
- This is a subjective measure that evaluates both the size of a
company's dividend yield and its sustainability. Very high
dividend yields tend to be quite unsustainable and the stocks
tend to have above-average risks, while stocks with very low
dividend yields are generally not worthwhile for long-term
- While there are numerous examples of reliable dividend payers
that hit hard times, the reality is that the best predictor of a
company's ability to continue paying dividends is the number of
years it has done so. Accordingly, the DARS™ Dividend Reliability
rating reflects not only the number of years that the company has
paid dividends, but a subjective evaluation of how likely it is
that current payout levels can continue.
- The DARS™ Dividend Uptrend factor reflects the company's
history of increasing its dividend, as well as a subjective
evaluation as to the likelihood of future payout increases.
- Dividends are ultimately dependent upon income and income
growth. Accordingly, DARS™ tracks a company's a company's
projected earnings growth to ascertain and rate its ability and
likelihood to continue paying (and/or raising) its dividend.
39. Dividends Once Dominated Investing.
It may seem hard to believe, but dividends were once the
preeminent consideration for equity investors. In fact, prior to
the Crash of 1929 and the Great Depression, it was routinely the
case that stocks were expected to yield more than bonds to
compensate investors for the additional risk that equities carried.
While the concept of capital appreciation was understood then,
investing on the basis of expected capital appreciation was
considered as something roughly equivalent to biotech investing
today - something that was highly speculative and only suitable for
the most aggressive risk-seeking investors.
40. Dividends: Antidote To Low Rates
Dividend-paying stocks can also offer investors an antidote to
low interest rate environments. Since the Great Recession, interest
rates have been at historically low levels, making it very
difficult for risk-averse investors to find attractive yields.
Although dividend-paying stocks are not as safe as government
bonds, they do offer better after-tax yields. As of late November
2012, the S&P 500 offers a yield of approximately 2%, whereas
two-year Treasuries offer 0.25%, 5-year Treasuries offer 0.63%, and
10-year Treasuries offer 1.63%.
While interest rates are determined in part by central bank
policy, corporate dividend policy is more independent and corporate
dividends can increase even while central banks are cutting rates
(and reducing available yields on bonds).
Be sure to visit our complete recommended list of the
Best Dividend Stocks
, as well as a detailed explanation of
our ratings system here
Created by Dividend.com