Picking a dividend stock is more complicated than simply comparing the yields across a set of stocks:
I’ve also learned that a dividend payout doesn’t tell you a thing about a company on its own. A fat payout figure can even be a bad sign if it’s the result of a stock price that’s hit the skids, or if an examination of the company’s cash flows indicates that its payout is unsustainable.
If the Congress does not extend the Bush tax cuts, we may see a dramatic increase in taxes on dividends. For those holding dividends stocks before that happens, might be in for a treat:
With the deficit rising from 1% to 3% of GDP, a new Congress isn’t likely to wait for the Bush tax cuts to expire in 2010, Bohnsack said. His company expects Congress to roll back the tax cuts in 2009.
The Bush tax cuts slashed the individual tax on dividends from as much as 38.6% to 15%.
But there will be a sweetener before that happens, according to the Strategas Research scenario.
More companies will pay special dividends this year, Bohnsack said.
Companies have become “almost like checking accounts,” he said. They are flush with cash because money is not being deployed in this troubled atmosphere.
With the economy heading for a possible recession and corporate earning and profits falling, there is less cash to distribute to shareholders. Despite the risk of cutting dividends on stock’s image, firms have already started doing so this year:
This year, companies in the S&P 500 have decreased or killed their dividends a record nine times, S&P says. Nextel is the fourth company, after insurer Progressive, (PRG) bank Sovereign Bancorp (SOV) and bond insurer MBIA, (MBI) to eliminate their dividends this year. That’s up from just two dividend cuts or suspensions in the same time period last year.
The Motley Fool reports that dividends paid by stocks in the S&P 500 are still quite significant:
But there’s more to know about dividends and the S&P 500. For one thing, dividend payments, in absolute value, have been rising lately. The folks at Standard & Poor’s have noted that dividend payments in 2007 totaled $27.73, up 11.5% over 2006. In the big picture, total dividend payments for S&P 500 companies came to $246 billion.
In 2003, Bush signed into law a cut in the tax rate on ordinary dividends to 15% (down from 35%). In 2010, the law expires. What will happen? Todd Wenning and James Early at the Motley Fool are worried:
As you can see, JGTRRA’s lower tax saved dividend investors quite a bit of money in a short period of time ($225 for the Progress Energy investor!). Over 10 years or more, the difference in after-tax dollars would be even wider.
They point out that since the law went into effect, the number of stocks paying dividends increased dramatically, while the returns on those stocks continue to be above-average:
Companies that choose to pay dividends are often out ahead in terms of corporate responsibility — and stability. In fact, numerous academic studies have shown that dividend-paying stocks beat those that don’t pay out anything. So, politics or not, they’re a smart place to be.
The Chinese market is still hot. Here are two stocks with focuses on China that pay reasonable dividends:
Aberdeen Asia-Pacific Income Fund Inc. (yield = 6.5%)
Aberdeen Asia-Pacific Income Fund, Inc. (the Fund) is a closed-end, non-diversified management investment company. The Fund’s investment objective is to seek current income. The Fund may also achieve incidental capital appreciation. It invests in Australian and Asian debt securities. The Fund normally invests at least 80% of its net assets plus the amount of any borrowings for investment purposes in Asian debt securities, Australian debt securities and New Zealand debt securities. Asian countries include China, Hong Kong, India, Indonesia, Japan, Malaysia, Pakistan, the Philippines, Singapore, South Korea, Taiwan, Thailand and Vietnam, and such other countries on the Asian continent approved for investment by the investment manager of the Fund. Aberdeen Asset Management Asia Limited serves as investment manager to the Fund. Aberdeen Asset Management Limited serves as investment adviser to the Fund.
Huaneng Power International, Inc.(yield = 3.56%)
Huaneng Power International, Inc., together with its subsidiaries, is engaged in the generation and sale of electric power to the regional or provincial grid companies in the People’s Republic of China. Its principal activities are investment, construction, operation and management of power plants. As of December 31, 2006, it wholly owned 17 operating power plants and had controlling interests in 12 operating power plants and minority interests in five operating power companies. Its power plants are located in 12 of China’s provinces, including Liaoning, Hebei, Shanxi, Shandong, Henan, Fujian, Jiangsu, Zhejiang, Guangdong, Jiangxi, Gansu, Hunan, and in Shanghai and Chongqing Municipalities. Its electricity generation business covers the Northeast China Grid, the North China Grid, the Northwest China Grid, the East China Grid, the Central China Grid and the South China Grid. During the year ended December 31, 2006, its total power generation reached 159.9 billion kilowatt hours.
In the recent turmoil in the markets concerning credit risk and the housing market, it is surprising to hear a real estate increasing its dividend (maybe it just needs to get rid of cash before bankruptcy):
Winthrop Realty Trust announced that its board of trustees has approved an increase of the quarterly dividend payable on its common shares of beneficial interest to $.065 per share or $.26 per share on an annual basis. The increased dividend will be effective commencing with the dividend paid for the third quarter of 2007.
If only American Home Mortgage had done that before the stock tanked!
Here is one company’s excuse for halting their remaining 2007 dividend payments:
Paying a stock dividend results in a large transfer of retained earnings into common stock, as well as higher Nasdaq listing fees and one-time expenses, said Michael M. Magee, president and chief executive, in a release.
That is Independent Bank’s CEO. The market reacted as one would expect:
Shares fell $1.15, or 9.6 percent, to $10.86 Friday after hitting a new year-low of $10.83 earlier in the session. Shares have been trading between $11.98 and $25.76 in the past 12 months.
As the stock market appears to be on the downturn, dividends stocks look more appealing. Moreover, the value of such stocks regardless of market conditions has improved since 2000. John Gin writes:
Since the dividend resurgence started early in the new millennium, stocks that pay dividends have steadily overcome their reputation as lackluster performers. In fact, according to Standard & Poor’s, dividend-paying companies returned 18.4 percent in 2006, compared with 13.7 percent for stocks of companies not paying dividends. That means, dividend-paying investments are not only offering the potential for steady income, capital gains have become an added bonus.
Here are some great options for 5% APY returns on FDIC-insured bank accounts:
HSBC Direct: 6% til April 30th, 5.05% thereafter.
Emigrant Direct: 5.05%
ING Direct: 4.5% with $25 sign-on bonus (so it comes out to about 5%. You need a referral…)
Amboy: 5.25%
Capital One: 5%
Remember, these are risk-free rates!