REIT Dividends Could Suffer from Debt Downgrade

All the news focus right now is on the possibility that the U.S. debt ceiling will not be raised, and that the U.S. could begin defaulting on its debt. This news has many investors worried, and looking for good dividend investing choices, just in case everything goes south.

Interestingly, some of the biggest losers from debt default, and the resulting credit rating downgrade, would be real estate investment trusts (REITs). It is very likely that REITs would suffer — and so would their dividends. This is because a credit downgrade would make U.S. Treasury debt more expensive. A downgrade represents an increase in risk. Without the sterling rating that U.S. Treasuries have enjoyed for decades, investors would demand higher yields on the bonds. Additionally, the paper held by REIT portfolios made up of debt insured by government agencies (Fannie, Freddie), would also suffer the same sort of downgrade.

Mortgage rates and other interest rates related to real estate are closely tied to the rates on Treasury notes (especially long term Treasuries). As the yield rises on Treasury notes, other interest rates rise as well, making it harder to borrow money. In some cases, this is vital when it comes to the ability to own real estate and find holdings for REITs. With REITs suffering, dividend payouts might be cut.

In the end, a possible debt default in the U.S. would have far-reaching consequences. It doesn’t seem as though politicians are able to find common ground as it relates to taxes, spending cuts and other conditions for raising the debt ceiling. As a result, it is a very real possibility that a deal may not be reached. It might be time to re-examine your portfolio, and make changes to the way you are doing things. It might be time to position yourself to take advantage of opportunities that can crop up during times of economic upheaval.

Roundup: What’s Next?

Often, when making investing decisions, we need to have an idea of what’s next. Whether that includes making decisions based on what we think will happen with the economy, or with a specific investment, or whether we try to plan what’s next based on our own finances. If you are interested in getting ready for what’s next, here some posts to consider:

  1. Valuation-Informed Indexing #52: The Realities Overvaluation Are Hard to Accept: As you try to decide what to do next with your investments, you need to confront the realities of overvaluation. Rob Bennett at Value Walk takes a look at overvaluation and how it can be a problem.
  2. Do You Need an Emergency Fund?: Mike at the Oblivious Investor takes a look at how you can prepare for the future. If you have the right portfolio size and liquidity, you might be able to get rid of your emergency fund.
  3. Do You DRIP?: If you are interested in keeping things going for the future, you might try a DRIP. Dividend Mantra takes a look DRIPs — and why he doesn’t participate in these plans.
  4. 6 Strong Companies with Double Digit Dividend Growth: If you are interested in investing in companies with strong potential, Matt at Dividend Monk offers some good ideas. He takes a look at 6 companies that might help you reach your goals.
  5. How To Choose Which Account To Invest From: The Passive Income Earner has some practical advice for figuring out which account to use when investing. No matter what’s next, this insight can help you make better decisions.
  6. Index trackers: The good, the bad, and the ugly: If you want a brighter future, it helps to understand your choices when it comes to index trackers. The Accumulator at Monevator offers some helpful insight into which index trackers are likely to help prepare you for what’s next.
  7. A Look At My Latest Trades: Enjoy some good ideas and some solid insight with this post from Mike at The Dividend Guy. Figure out what you can do to improve your portfolio performance.

Cash Rich Companies: Time to Increase Dividends

One of the side effects of the financial crisis and the subsequent recession has been the tendency of companies to hoard their cash. Many companies cut dividends, or did away them altogether, during the recession. There are some companies that are sitting on piles of cash right now. Many companies have been seeing better than expected earnings, and all of that cash could be put to different uses. One of those uses might be increasing the dividends they pay out to shareholders.

Using Dividends to Attract Investors

Many companies use dividends to attract investors. In some cases, these companies offer dividends that are unsustainable in order to bring in investors. While you can get some good opportunities with these types of stocks, you might not want to invest in a company that could cut dividends quickly. If you are looking for income investments, considering companies with lots of cash might be a good idea. These companies are generally strong companies, and often include dividend aristocrats that regularly increase payouts.

Companies devoted to rewarding their shareholders when they have extra cash are more likely to attract long term investors – investors who are likely to stick with the company over the long haul. And investors can get decent returns. Indeed, many dividends stocks are providing better yields than what could be had with Treasury bonds and many corporate bonds right now.

Some Companies Do Other Things with Cash

Not all companies pay out more dividends when they have the cash. Instead, some companies initiate stock buy backs, or make acquisitions of other assets. Indeed, Microsoft recently used some of its piles of cash to spend billions to buy Skype. No dividends there. In other cases, companies reinvest their cash in equipment, advertising or other assets meant to help grow market share or increase profitability over the long run.

For some investors, though, this is a worthwhile exchange. Rather than getting dividends, some investors are content to benefit from a share price that goes up on mergers and reinvestment moves that turn out well. Investors looking for regular income, though, are more likely to decide to go for dividends, since they provide the opportunity to for people to create an income portfolio that can offer stability for years.

Bottom Line

Your investing goals will help you determine what you prefer. If you want to build an income portfolio, choosing companies that give cash back to shareholders is ideal. If you are more interested in growth and returns, looking for companies that reinvest, rather than paying cash to shareholders.

Quarterly Dividends Declared: SJM, V, AA, KEY, FNBG, CEG

Various companies are declaring dividends, and even increasing dividends right now. While some companies, like Ford, are hoarding cash, others are returning it to the shareholders. Many companies are concerned about the state of the economy, and where things might go from here, especially with concerns about about the possibility of a U.S. debt default.

However, even in these times, some companies are still paying dividends — and even raising them. Here are some of the expectations from companies like Smucker, Visa, Alcoa, FNB Bancorp and Constellation Energy:

  • SJM: J.M. Sucker Co. just announced that it is raising its quarterly to 48 cents a share. This is the second time this year SJM has raised its dividend. The company is trying to return more money to shareholders, rather than hoarding cash.
  • V: Visa’s board of directors has declared 15 cents a share for a quarterly dividend on Class A common stock.
  • AA: Alcoa, the well-known aluminum company, has announced that it will pay 3-cent-per-share dividend on common stock, and a 93.75 cent dividend on preferred stock. Shareholders of record on August 5 with receive the common stock dividend on August 25, while shareholders of preferred stock (of record) on September 9 will receive their payout on October 1.
  • KEY: KeyCorp is boosting its dividend payout to 3 cents a share. Like many banks KEY is beginning to ease back into dividend payouts. With profits rising for the financial sector, many shareholders are anxious to begin receiving dividends again.
  • FNBG: FNB Bancorp has also declared a dividend. This one is a dividend of 6 cents a share. It will be paid on August 26 to those who are shareholders of record on August 5.
  • CEG: Constellation Energy is declaring a quarterly dividend of 24 cents a share. This company provides power throughout the U.S., and provides natural gas services. With energy prices likely to rise soon, CEG is poised to continue seeing gains.

Roundup: Newsy Goodness

A lot of the investing bloggers tie their buys, analysis and commentary to what’s happening in the news right now. This can be quite helpful, since it provides you with some insight into how current events can influence your portfolio. If you are looking for some timely advice and commentary to help you improve your portfolio, here are some great posts from the last week:

  1. ConocoPhillips Splits into 2 Companies — Who’s Next?: Could future gains be around the corner for shareholders? If more energy companies follow the example of ConocoPhillips (following Marathon), it’s a possibility. The Dividend Pig explains why.
  2. Got Coke?: Looking for an interesting addition to your portfolio? The Dividend Guy offers an analysis of Coca-Cola (KO), and shares some of the recent news that might make the company a good buy.
  3. Energy Transfer Partners (ETP): A Stable 7.4% Distribution Yield: Another analysis of a company that could provide you with stable income as part of your portfolio, Matt at Dividend Monk evaluated ETP. It’s worth a look, in light of recent news.
  4. Recent Buy: A great look at what Dividend Mantra recently added to his portfolio. Take a look at the replay, and how the latest news affected his returns. A great, newsy look at what’s happening in one investor’s portfolio.
  5. Borders Goes Out Of Business: Who benefits from the Borders closing? Mark on Buy Like Buffett shares a news items about Borders, and mentions that Amazon, and Barnes and Noble are likely to benefit from the reduction in competition, as well as taking a look at what is possible for traditional bookselling.
  6. Why Electric Cars Won’t Kill Oil Anytime Soon: Before you get too excited about the future of energy, read this post from Beating The Index. A realistic look about the prospects for oil in the near future.
  7. How to live off investment income: A great piece from Monevator about how to live off your income from investments. Practical, helpful advice for setting up an income stream that will be adequate —  no matter how dire the news.

Choosing Dividend Stocks With Cash Flow

When it comes to choosing a dividend stock, many of us are tempted to look solely at items like dividend yield or dividend growth. A stock with a high yield, or a recent history of big hikes, might seem especially tempting. However, we shouldn’t always just look at how a company is doing now in terms of dividend yield, or the past trends associated with dividend growth. It is also important to consider the fundamentals, including the state of a company’s cash flow and cash reserves. A snapshot of the company’s financials in the last couple of years can be quite telling.

Why Cash Matters to a Company

As you consider different options for your dividend portfolio, it is important to look at what different aspects of a company’s finances say about the company as a whole. Cash can tell you a few things about the strength of a company:

  • Cash reserves usually mean that the company spends less than it earns.
  • How the company spends money can indicate what is important to it. If a lot of money flows to people at the top, or if more of it goes to reinvesting in the company’s developing, can say a lot about the future success of a company.
  • A cash rich company can usually keep paying a dividend – and is less likely to cut payouts when the economy (and the market) is in a downcycle.

Taking a look at the cash habits of a company can provide a good indication of how long it can keep payouts at the same level. If you see cash reserves dropping, it might be a sign that dividends are about to be cut. When there isn’t any cash to spread around to shareholders, it soon becomes evident that dividends will have to cut, and you could find yourself in trouble.

For some, cash isn’t important. If you have short-term goals for your dividend portfolio, it doesn’t matter as much if the company is likely to cut dividend payouts. With a large chunk of capital, you can do well for a year or two with a high yield dividend stocks. Then, you can sell the stock before the price drops and the dividend is cut.

Others, though, find it a better idea to invest in cash rich companies that pay dividends. Companies with sound financial practices and plenty of cash are more likely to provide stable income for you. If you have long-term income requirements for your dividend portfolio, the company’s financials should be carefully considered before m

As U.S. Default Threat Looms: Consider NVS, XOM, JNJ, INTC

The big news this week is the difficulties about coming to an agreement to raise the debt ceiling here in the U.S. Before agreeing to raise the debt ceiling, some are insisting that changes be made to encourage better fiscal habits in the U.S. Getting a deal done is quite difficult, and concerns are mounting with regard to a possible U.S. debt default.

In times like these, it makes many investors jittery. If the U.S. does default, will the stock market crash? No matter what happens with the U.S. debt ceiling, though, economic recovery is still a long way away. In these troubled times, choosing dividend stocks might be a good idea. Here are 4 dividend stocks to consider as a U.S. default looms:

  1. Novarits: NVS is a health care company. With an aging Baby Boomer population, this pharma and consumer health company offers regular dividend raises, stability, and a product that will always be needed — no matter the economic conditions. Plus, as an international company based in Switzerland, NVS isn’t entirely dependent on the U.S.
  2. Johnson and Johnson: A stalwart dividend aristocrat, JNJ is known for its consumer health products. Like NVS, JNJ offers something that will always be needed. The company has strong financial fundamentals, and is likely to recover from any catastrophe that is brewing.
  3. Exxon: If the U.S. really does begin defaulting on its obligations, the U.S. dollar will sink and commodity prices — like oil prices — will rise. Energy companies like XOM will be in a place to profit. Even if the U.S. doesn’t default, growing appetite for the world’s resources, especially from places like China and India, means that things are likely to remain positive for XOM.
  4. Intel: With cloud computing becoming the next big thing, and with the growth of the tablet market, INTC is positioned to do well. Even with economic troubles in the U.S., there is likely to still be opportunity for INTC, a solid company that should do well as long as it moves with the times.

Roundup: Strategy Session

If you want your dividend portfolio to succeed, you need to have a plan. Creating a strategy for your dividend portfolio is a good way to make sure you ave what you need to find success. Without a strategy, you can miss out on gains, and find yourself investing in an inefficient manner. Here are some great posts from the past week that can give you some insight into investing strategy:

  1. Step 8: Prune and Grow: The penultimate post in Dividend Monk’s series on building and managing your dividend portfolio offers some helpful insights on nurturing your portfolio. Learn how to create a strategy that will keep your dividend portfolio on the right track.
  2. Spending Strategies in Retirement: If you want your retirement nest egg to last, you need a good spending strategy. Oblivious Investor goes over some of your options. Use this as a guide to helping you decide which strategy best suits your investing and retirement goals.
  3. Chasing Highest Yield Dividend Stocks Is Chasing Your Own Loss: Over at The Dividend Guy, you can learn more about the pitfalls of using dividend yield as your only basis for investing strategy. Consider other options as you decide on stocks for your dividend portfolio.
  4. Valuation-Informed Indexing #50: “Approximately True” Investing Advice Doesn’t Cut It Anymore: It used to be that general advice could help you. Now as you strategize, though, you need a little more to go on. ValueWalk helps you see what’s true now about value investing.
  5. How to choose the best index trackers #3: Overlooked stuff: As you decide on what index trackers to use, take into consideration these strategy tips from Monevator. Addresses things you might not normally think to consider.
  6. 10 Financial Tips in July: Some great tips and strategies, from Beating The Index, that can come in handy during July. Save some money — and then invest it!
  7. Would the Real “Fund” Please Stand Up: What is a fund, anyway? Dividend Ninja explains the different types of investments bearing the term “fund,” and helps you identify the true funds. A great help when you strategize about dividend funds.

Should You Rebalance Your Portfolio?

One of the questions that many have about their dividend portfolios is this: “Should I rebalance?” The answer, of course, depends on your investing and dividend goals. If you have a long-term investing plan for your dividend portfolio, hoping for growth in the stocks you hold as well as benefitting from the dividends, rebalancing becomes quite important.

What’s Your Target Allocation?

The first thing to do is remind yourself of your target allocation for this portfolio. In some cases, your investment plan might call for a shifting target allocation, depending on where you are at in life. Consider your current position, and think about what your dividend portfolio should like right now. Then, review your dividend portfolio. You might be surprised at how recent additions might have skewed your portfolio. Additionally, if you have dividend funds, you might find that changes to the funds themselves might have changed your asset allocation. If your asset allocation doesn’t reflect your current position and plans, you need to rebalance.

Are You Unhappy with Your Level of Diversity?

Next, you need to look at the level of diversity in your dividend portfolio. Are you unhappy with it? Consider your goals, and consider the latest industry news. You might be unhappy with your current level of diversity, and interested in changing matters. Review your dividend investments, and make sure you aren’t relying too heavily on one industry, or one asset class. You could find yourself in trouble if that one area runs into problems and everyone starts cutting dividends – or if everyone tanks close to your target retirement date. Dividends aren’t much use if you were planning to sell the stocks and do something else with earnings. If you don’t have your desired level of diversity, rebalance your portfolio until you do.

Individual Stocks

You should also consider your feelings about the company itself. Do a little fundamental analysis. Has something changed about the company at the most basic level? If you are unhappy with some of the companies in your portfolio due to management changes, profit margin shrinkage, or loss of market share, it might be time to pull out and look for another option. It’s also a good idea to be wary of dividend stocks that have experienced a lot of cuts to pay outs recently. This is especially important if you rely on your dividend portfolio for a revenue stream. If too many cuts are affecting your income, it might be time to rebalance your dividend portfolio so that your income is restored.

Bottom Line

Take time at least twice a year (or as much as every quarter) to consider your dividend portfolio. Make changes as necessary so that your portfolio continues to reflect your current needs and future goals.

Dividend Hikes This Week: AYR, BAC, DRI, GIS

Dividend stocks are at it again. With capital gains on the rise, and a good short week for the stock market (aside from today), some companies are feeling a little flush with cash — and willing to share with stockholders. Indeed, it says quite a bit for dividend paying companies that, in the last 36 years, payers have outperformed non-payers on the S&P 500 by about 8%. This week, some dividend hikes were announced from AYR, BAC, DRI and GIS. If you are into dividends, the fact that hikes continue is good news.

Aircastle (AYR), with its solid performance this year, has finally made it clear that it is ready to increase its dividend. At current prices, the dividend yield is up to 4%, thanks to a 25% increase that brought the dividend up to 12.5 cents a share. The company leases aircraft, as well as makes loan investments secured by aircraft. You are likely to see some risk with this company.

Bank of America (BAC) hasn’t actually seen a dividend increase yet, but it’s important to keep an eye on things. BAC is trying to recover from its acquisitions of Countrywide and Merrill, and that has been a struggle. BAC keeps asking for permission to raise dividends, and was even able to raise on preferred shares. For the common shares, though, it may be another year or so before a dividend hike is seen — but BAC will keep trying.

Darden Restaurants (DRI) has been meaning to make dividend hikes an important part of its strategy since the company took a bit of a hit during the recession. Darden is the company that owns Red Lobster and Olive Garden, as well as other casual dining restaurants. With some economic recovery, the company is seeing some better profits, and the latest dividend hike of 34.4% brings the dividend to 34 cents a share.

General Mills (GIS) announced its hike to 30.5 cents a chair — an increase of 8.9%. The company has been in business for about 145 years, and its longevity, plus the fact that people need to keep eating, tends to inspire confidence. This latest hike brings the yield on GIS up to 3.3%