Choosing Dividends: A look at the fundamentals

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When choosing a dividend stock, there are plenty of things to consider. Indeed, you want to carefully consider different aspects of a stock before adding it your dividend portfolio. So, while you are considering dividend yield, and P/E ratios, don’t forget, too, to consider the fundamentals of a company.

Looking at the Big Picture

It’s true that at dividend can say a lot about a company. However, a company can also have a lot to say about how likely the dividends are to remain stable, see increases, or see cuts (or elimination). Look at the big picture for a company, it’s fundamentals, to get an idea of what might be coming next for its dividends.

Fundamental analysis, when you are looking at a stock, is about more than just how the stock performs day to day. The technical aspects of the ups and downs in short-term price action don’t really figure in to fundamental analysis. Instead, the idea is to take a look at items that are likely to affect the overall stock performance over time.

Some of the factors to consider when you are looking at the fundamentals include:

  • Management: Who is in charge of the company? Are the top people capable? Do they make good decisions? Has the company management been relatively stable and consistent over time? A look at the way a company is managed can be quite telling.
  • Profits/earnings: Take a look at a company’s profits and earnings. This doesn’t need to be a full on analysis; simply look at the trends, and whether the company has been able to maintain decent profits over time.
  • Growth potential: Does the future look reasonably bright? What’s the company’s potential for growth? In some cases, even if the growth potential for a company is relatively weak, the fact that it will see steady growth (even if it is small) can be a bonus. Take a look at where the company appears headed over time.
  • Balance sheet: Also, take a look at the way the company handles its cash flow. How much money is coming in? Can the company handle its debt load? A company whose balance sheet requires constant adjustments, and that seems to show a growing debt load might be a bad call.

Why it Matters to Dividend Investing

These fundamentals can be useful in choosing dividend stocks, since they offer insight in how well a company is likely to hold up over time. Those companies expected to thrive are more likely to continue to raise dividends over time, consistently. A company in trouble, though, may need to slash or eliminate dividends. If your fundamental analysis of a company shows that it could be struggling soon, it may not be the best idea to invest. After all, if you are looking for stable cash flow from your dividends, a company with poor fundamentals may not be the way to go.

Before you decide on a course of action, make sure that you will be getting what you need from the dividend stock. Make sure the fundamentals are strong.

The Canadian Telecoms

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The Canadian Telecommunication companies such as Bell (BCE-N), Rogers (RCI-N), Telus (TU-N), and Shaw (SJR-N), are exceptional dividend paying stocks. As a U.S. investor, you can take part in four of Canada’s largest communication companies which will pay you a generous dividend yield. More importantly, you can buy these top Canadian companies without having to worry about foreign content rules, since they are all traded on the NYSE.

These are established and large cap companies, and for the most part are well managed. BCE and Shaw Communications however have accumulated more debt throughout 2010 to 2011, in large part due to acquisitions and service upgrades, among other reasons. Telus is the exception, with lower debt and a reasonable dividend payout ratio, and in my opinion the best of the Canadian telecoms to invest in.

Why Buy Canadian Telecoms?

If you aren’t investing in Canadian Telecoms, then you may want to consider them, even with their higher debt. These giant blue-chips are hybrids between technology and communication companies, and therein lay their strength and economic-moat. They are really utilities which actually own, maintain, and operate the communication infrastructure throughout Canada.

They make their money through cell-phone sales, cellular contracts, internet service providing, and basic telephone or cable services. Since these companies already have the infrastructure in place, and maintain it, the profit is in each subscriber – and a hefty profit it is. Canadians’ have learned to love but hate their telecoms, with their high fees and less than stellar customer service. But at the end of the day (like banks) people are left with little choice but to use them.

While it’s a very competitive sector, telecoms are more stable then tech only oriented companies. It really doesn’t matter whether the iphone, blackberry or android phone prevails. And it doesn’t even matter if the iPad wins over a Samsung tablet. Since the telecoms own the infrastructure, they simply provide access to wireless services, and sell end users cellular contracts with the latest phones or devices. It’s a win for telecoms regardless of what new hot product is out.

How Wide is the Moat?

The economic moat for these Canadian telecoms is extraordinary. Canadians pay some of the highest cell phone fees in the world!  Obviously that’s bad for Canadian consumers, but translates into profit for shareholders.  Many people believe the CRTC (Canadian Radio-television and Telecommunications Commission) governs the cell phone industry in Canada, but they do not. The cell phone industry in Canada is largely unregulated. As a result the big players (Telus, Bell, and Rogers) have pretty well locked down any competition and charged whatever prices they see fit.

Even with the smaller players such as Wind Mobile entering the stage, and undermining the cellular pricing market, the big three telecoms have held their ground. The reason is simple, the big three telecoms in Canada aren’t just cell-phone providers. They are diversified and well established communication companies with huge capital and resources available to undermine their competition.

How Resilient are the Telecoms?

During the recent market correction at the beginning of August, the Canadian telecoms performed remarkably well compared to other sectors. Looking at the beta of these companies, the answer becomes obvious. Any beta value below 1.0 means the company is less volatile than market index it is a part of. Therefore for most investors, a lower beta is preferable. As compared to the NYSE, Bell (BCE-N) has a beta of 0.771, Rogers (RCI-N) has a beta of 0.679, Telus (TU-N) has a beta of 0.453, and Shaw (SJR-N) has a beta of 0.597. These telecoms have a low volatility with a good dividend yield.

Bell Communications (BCE-N)

Bell (BCE Inc.) is Canada’s largest communications company, with over 30.17 billion in assets. BCE provides cellular service, both satellite and cable television, internet service, and of course phone landline services.  BCE currently trades at US $38.80 per share, has a PE Ratio of 15.11, and a debt-to-equity ratio of 101.31. The dividend yield is currently a very generous 5.4%, but the dividend payout ratio (DPR) of 80.93% is high for a big blue chip.

According to a recent Globe & Mail article, BCE has raised its quarterly dividend six times (a cumulative 41 per cent) since the fourth quarter of 2008. While most Canadians are enamoured with their biggest telecom, I have not purchased BCE because of the high DPR and high debt load, both increasing since the start of the year.  Nonetheless, BCE is a favourite among Canadian dividend investors.

Rogers Communications (RCI-N)

In second place for market cap among the Canadian telecoms, is Rogers Communications with a market capitalization of 20.73 billion. Rogers is Canada’s largest provider of wireless services, and also owns Fido (previously Microcell Communications). Rogers also provides cable TV, internet, and phone services. The company also provides broadcasting services, magazines, and sports entertainment. Rogers currently trades at US $37.93 per share, has a PE Ratio of 14.54, but with a very high debt to equity ratio of 266.01. The dividend yield is 3.80% with a dividend payout ratio of 54.78%.

Telus Communications (TU-N)

Telus Communications is Canada’s third largest telecom with a market capitalization of 15.98 billion. Like its competitors, Telus provides internet, phone, and provisions an extensive wireless service across most of Canada. It currently trades at US $49.25 per share, has a PE Ratio of 14.33, a debt-to-equity ratio of 88.94, and a dividend yield of 4.50%. The dividend payout ratio for Telus is 64.5%. In my opinion the solid DPR and lower debt, make Telus a preferable investment in Canadian telecoms, as compared to BCE and Rogers.

Shaw Communications (SJR-N)

Shaw Communications provides telephone, Internet, and television services as services primarily in British Columbia and Alberta (we use Shaw at home). Shaw has come under heavy criticism for its $69 million-dollar pension to former CEO Jim Shaw, its purchase of CanWest Global, and its family run board that leaves shareholders without voting rights.  It is one of the smaller telecoms with a market cap of 9.37 billion. It currently trades at US $21.52 per share, has a higher PE Ratio of 18.81, and a higher dividend payout ratio of 80.7%. It also has a higher debt to equity ratio of 166.7. Shaw is a monthly dividend payer, and with a yield of 4.30%, makes an interesting investment for income oriented versus growth oriented investors.

Roundup: Learning Curve

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We all have a learning curve to go through, in life and with money. As you learn more about money, and work to improve your ability to build wealth, you can get a little help along the way. Here are some great articles from around the blogosphere, addressing different points on the learning curve:

  1. Dividend Dad How I Show The Importance of Money To My 6 Year Old Son: The Dividend Guy offers a great look at teaching children the importance of money. This is a great process to help kids learn.
  2. What Happened to the Income Trusts? Part – 1: Dividend Ninja takes a look at income trusts. You remember those? Whatever happened to them? A great overview of where investing is headed.
  3. Seth Klarman’s Top 5 Dividends: If you want a look at some of the best dividends, Dividend Monk offers a peek at what guru Seth Klarman has. And don’t forget to check out the holdings of other greats in this series.
  4. Why A Low Payout Ratio Is Important: As you begin dividend investing, it’s important to make sure that you understand the implications of payout ratio. Dividend Mantra explains that sometimes a stock with a low payout ratio is the way to go.
  5. Are Roth Accounts Overrated?: Many people like Roth retirement accounts. Even though you pay taxes now, you don’t have to pay taxes on your earnings. However, Oblivious Investor takes a look at the possibility that they might be overrated.
  6. Saving Your Money Vs Investing It: Are you concerned about your money? Should you build up savings, or invest? Buy Like Buffett takes a look at saving and investing, and helps you figure out what might work best for you.
  7. Financial goals: Sticking to the plan when the funk comes to visit: Monevator points out that you can’t just abandon your plans when something unexpected happens. Stick to the plan, even when you might feel a little out of sorts.

Using Income Funds for Diversity and Revenue

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One of the ways that you can build up your investment portfolio is to look into income funds. Income funds provide you an opportunity to build a revenue stream, as well as add a little instant diversity to your portfolio.

What Are Income Funds?

Income funds are fairly straightforward. They represent a collection of investments that provide income. These can include dividend paying stocks, bonds and other investments that provide income. Many people find income funds attractive because it provides them with a source of income, while at the same time providing some sort of diversity. Many income funds look to dividend aristocrats and “safer” bonds like Treasuries when choosing what to include in an income fund.

It is important to note that most income funds are not going to show a lot of growth. They are not constructed to provide you with high earnings, but are instead meant to provide steady income. If you are looking for get rich quick investments, income funds usually aren’t the way to go. Instead, these funds are created to provide as stable a cash flow as possible.

Using Income Funds to Your Advantage

There are two main ways that you can use income funds to your advantage:

  1. Create a source of income: The first, obviously, is to create a source of income for you. You can build up your investments in income funds over time, so that you eventually have enough shares to warrant larger payouts. Many people nearing retirement put a chunk of their nest egg into income funds in order to receive a regular payout – even as the value of the investment theoretically increases.
  2. Reinvest dividends to build wealth: Another option is to reinvest your earnings in order to build wealth. Many income funds are set up so that proceeds you receive are automatically used to buy more shares. This means that you are basically getting free shares. This can increase what you own at a much quicker pace. This way, when you decide to start receiving payouts rather than reinvesting, you own more shares and receive more. Additionally, this can be a way to build the number of shares you have so that you get more if you decide to sell your investment later.

If you follow the reinvestment route, you can improve your retirement nest egg by keeping your fund in a qualified retirement account. You can receive a tax advantage by combining your income fund with your retirement account. It’s a great way to build your nest egg while reducing the amount of wealth eroded by taxes.

Bad News for Stock Markets Makes Good Dividends Easier to Spot

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The big news this week has been a series of losing days on the stock market. U.S. stocks have been retreating on uncertainty related to what’s happening in the euro zone, as well as what’s next for the U.S. economy. With Nobel laureate economist Paul Krugman predicting that the chances of a global recession are at 50% right now, and with investors fairly certain that more political gridlock is on the way over President Barack Obama’s latest jobs plan, there isn’t a lot of hope to go around. The markets dislike uncertainty, and right now, everything seems fairly uncertain.

However, in terms of dividends, the disappointing stock market performances of the past week actually provide some positive news: It’s easier to spot good dividend yields. Indeed, thanks to dropping stocks, the Wall Street Journal reports that about 25% of the S&P 500 pay dividend yields of more than 3%. Now is a great time to do a little bargain hunting for great deals on slow growers. Some of the possible choices for significant gains — when you include dividends reinvested — include:

  • Chevron (CVX): Returns of almost 200% with dividends reinvested.
  • Consolidated Edison (ED): Returns of about 128% with dividends reinvested.
  • Altria (MO): Returns of more than 300% with dividends reinvested.

The Wall Street Journal points out that that these are gains over the last 10 years, and they have more than outpaced returns of the S&P 500 with dividends reinvested. The point is that now, with the stock market struggling, you can more easily spot higher yields — and pick the stocks up at bargains.

It will be interesting to see what happens next. Volatility is likely to continue, but there are ways to reduce your risk. Looking for solid dividend stocks can be one way to improve the chances that you avoid some of the worst of the issues related stock market volatility, and now might just be your chance.

Is Intel A Good Buy?

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Founded in 1968, Intel Corporation (INTC) has grown into a 104 billion dollar company that today dominates the global semi-conductor industry, providing processors for the PC and server market. It is only second to Korea’s Samsung Electronics, with a market cap of 118 billion.

Intel derives approximately 90 per cent of its revenues from the PC market. Over the years it has dominated and trampled its main competitor Advanced Micro Devices (AMD), and left other chip producers such as Texas Instruments (TXN) far behind. It also has a generous dividend yield of 4.30%, a debt to equity ratio of 0.40, a low PE ratio of 9.01, and a low dividend payout ratio of 38.5%. Intel currently has revenue of 48.44 billion (trailing twelve months), with a quarterly revenue growth of 21%. The balance sheet is certainly solid, and with the price at USD $19.64, off -17.7% from May highs, Intel is looking to be an attractive buy.

Missing the Mobile Wave

What Intel does best is produce high performing chips for PC’s and servers, which require speed and power. However mobile processors built for cell-phones or tablets do not use Intel processors (namely Intel’s Atom processor) since Intel chips are heavy on power and run at high temperature. Mobile devices including Apple’s ipads, tablets, and most cell phones run on the ARM (LSE: ARM.L) based processors, largely produced by Samsung. These chips generate less heat and require less power.

Samsung continues to be the leading provider for ARM based processors in the tablet and mobile market. However relations between Samsung and Apple are less than stellar. Back in May, Apple had been rumoured to be making plans with Taiwan Semiconductor Manufacturing Co. to produce the company’s A5 chips. Then there is Google’s recent acquisition of Motorola, which also produces chips and phones to a lesser degree, mainly for Google’s Android phones.

Intel has so far missed the boat on the mobile wave, and continues to produce the high-powered chips for PC’s and servers. While there will always be a demand for Intel’s products and the PC and server market will always remain, the tides of change are already apparent. For example, Hewlett Packard (HP) stunned markets in mid August, when they announced they may abandon their PC business, in a move away from the consumer market. Intel supplies chips to HP.

Should You Invest?

Currently Intel provides an excellent investment opportunity from both a price point and with its fundamentals, as well as a generous dividend. If you are buying Intel as a long term investment, then you need to ask yourself two questions. First, is Intel’s economic-moat in the PC and server markets, enough to sustain its strong revenue and growth? Second, is Intel’s absence in the mobile device marketplace a factor to its future? It really depends on whether the PC and server markets, the core of Intel’s revenue will continue in the years to come. In the future, a lot may ride on whether Intel can move into the mobile market, expand into other markets, or collaborate with Apple. With the constant tides of change in the technology sector, buying Intel isn’t as clear cut as one might expect.

Why You Need to Pay Attention to the Ex-Dividend Date

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Dividend investing can really be a good way to earn a little extra income. Indeed, if you create a plan, and take advantage of dollar cost averaging, it can also be a way to build up a substantial portfolio that can yield solid income opportunities. As long as you are reasonable about your dividend expectations, you can eventually build up a stream of income that can serve you well in retirement, during an emergency, or for other purposes.

One of the things that many dividend investors overlook – at least at first – is the ex-dividend date. It is important that you pay attention to this date, since it can affect when you are actually entitled to a dividend.

Ex-Dividend Date

It sounds like it might be a little ominous (it’s the “ex” that does it), but the ex-dividend date is actually rather straightforward. This is the date at which you become legally entitled to the dividend. But the process of determining the ex-dividend date does take a little bit of twisting and turning.

In order to receive the dividend, you must be a shareholder of record by a specific date. This is often called the record date. We can use Pepsi (PEP) as a recent example. One July 15, 2011, PEP announced that there would be a regular dividend payout of $0.515 per share. This payout will be made on September 30, 2011, to shareholders of record on September 2. That means that, to be able to receive the PEP payout, you have to own shares at market open on September 2, which is the record date.

If you don’t own shares of a dividend stock at the time of opening on the record date, you will miss the dividend payout for that period. This is where the ex-dividend date comes in. You should realize that it takes time to process transactions. It takes two days for you to become the legal owner of shares, as opposed to being the practical owner. So, if you buy shares of PEP on September 1, you won’t be a legal owner in time to be a shareholder of record. You need to buy your PEP shares on August 31, 2011, if you want the PEP dividend payout on September 30.

So, basically, the ex-dividend date is two days before the record date. If you want to be able to get in on the next payout, or if you want to increase your payout by purchasing more shares, you need to make your dividend stock purchase by the ex-dividend date.

Bottom Line

When companies release press releases about their dividend announcements, you won’t see mention of the ex-dividend date. However, this is a very important date. If you want to be entitled to receive the next payout, you need to know the ex-dividend date. Luckily, figuring it out is fairly simple: Just make sure you buy your shares at least two business days prior to the record date.