Roundup: What’s Going On Here?

It’s been a little bit crazy lately. And by lately, I mean today. Really? Several central banks act to weaken the US dollar, as a way to shore up markets, and everyone gets excited? Even though the Dow is up more than 400 points in early afternoon trading, this doesn’t address underlying problems. But it does have many asking this question: What is going on here?

  1. Top Dividend Stocks – November 2011 Edition: The Passive Income Earner shares a list of top dividend stocks for November. What’s going on with these stocks? And can they boost your portfolio?
  2. What Happened to the Income Trusts? Part 2: Why doesn’t anyone use income trusts anymore in Canada? Dividend Ninja takes a look at these once-venerable investments and asks what happened.
  3. Invest $25,000, Make Money and Don’t Even Dip Into Your Pocket To Fund Your Investment!: Is leverage a good idea? Maybe, if used carefully. The Dividend Buy Blog explains how you can be smart about using leverage, and use it to make money investing. Make sure you pay attention to his caveats, though.
  4. Are BlackRock index trackers cheap?: Thanks to recent fees on index trackers, you might be paying more. However, there is a workaround with BlackRock index trackers. Monevator warns, though, that it might not be as great as it seems.
  5. Marc Faber Doesn’t Think Consumer Spending is Sustainable: Consumers are spending again! It’s the holiday season! However, it could all change again, as Value Walk points out that some think that this type of spending isn’t sustainable.
  6. Why I Cancelled My Gym Membership: Forget paying the fees. Dividend Mantra cancelled his gym membership and is working out on his own.
  7. What to Do with a Windfall: Come into some good fortune? Don’t be hasty. Oblivious Investor offers some ideas for your windfall so that you get the best use out of it.

Dividend Taxes: Qualified vs. Non-Qualified Dividends

For the last few years, there have been tax breaks for investors with long-term capital gains, as well as for qualified dividend investors. As part of a tax deal at the end of 2010, favorable tax rates on qualified dividends were extended through 2012, so the same tax rates apply to qualified dividend income as apply to long-term capital gains. Right now, that means that those in the 10% and 15% brackets pay no taxes on such income, and those in higher brackets pay 15%.  (Everything could change starting in 2013, depending on what Congress decides to do.)

This situation means that many people have been enjoying tax-free dividend income – as long as it’s qualified. You need to have an understanding of qualified dividends vs. unqualified dividends if you expect to fully take advantage of your tax status:

Qualified Dividends

Information on dividends, and how they are taxed, can be found in IRS Publication 550. “Qualified” status is awarded to dividends that are paid by a U.S. corporation, or a properly qualified foreign corporation. In most cases, the dividends you earn as a result of stock held in most U.S. C corporations are considered qualified dividends. Additionally, you must meet a specific holding period.

In order to be “qualified,” the IRS says that you must own the stock for more 60 days during the 121-day period beginning 60 days prior to the ex-dividend date. As long as you keep things relatively simple, this is fairly easy to figure out. Things start to get a little more difficult when you use option strategies. You might need a tax professional to help you sort things out in more complicated scenarios.

Non-Qualified Dividends

Even if your stock holdings meet the requirements above, there are some dividends that are never treated as “qualified.” You should be aware of these dividends, so that you don’t make the mistake of paying less in taxes than you owe. Here are the items that the IRS says will never be treated the same as “qualified” dividends:

  • Capital gains distributions.
  • Dividends paid from tax-exempt corporations or famer’s cooperatives.
  • Dividends received from deposits with credit unions, building and loan associations and financial institutions that are structured similarly.
  • Payments received in lieu of dividends, if you have reason to know that they are not “qualified” dividends.
  • Dividends paid on ESOPs maintained by corporations for their employees.
  • Dividends from stock shares that require you to make related payments for positions that are in substantially similar or related properties (such as in the case of a short sale).
  • Shown dividend payments in box 1b of Form 1099-DIV from a non-qualified foreign corporation.

If you have questions about the status of your dividend payments, it’s a good idea to double check with a tax professional or investment professional. Non-qualified dividends are taxed at your normal tax rate, so if you are in a marginal tax bracket above the 15% level, you will have to pay that tax rate.

European Debt Sends S&P 500 to Thanksgiving-Week Performance not Seen Since 1932

The debt situation in Europe has led to the worst Thanksgiving-week performance for the S&P 500 since 1932. U.S. stocks saw a rather large weekly loss, even though Thursday was the Thanksgiving holiday, and Black Friday saw only a modest drop. Huge losses earlier in the week added up to a dismal performance for stocks in general.

The past week saw tumult as bond auction after bond auction resulted in failure, and as the French received a debt warning, and Belgium saw its credit rating downgraded. So far, in November, the S&P 500 had lost 7.6%,  and today marks the seventh consecutive session of losses for the index.

German Lenders May Need to Raise Capital Levels

The European Banking Authority is deciding whether or not German lenders need to increase their capital requirements. German banks are among those that had to accept a write down of Greek sovereign debt, and the result is that banks may need more capital. As expected, German banks are disputing the need for increased capital, and insisting that matters are in hand.

Bank Dividends Unlikely to Rise to Pre-Crisis Levels Soon

As a result of the all the tumult in the markets, we are unlikely to see bank dividends rise much in the coming weeks and months. Indeed, it will probably be quite some time before the likes of BAC, JMP, and C raise dividends substantially. Recent quarters have seen some improvement in bank dividends, but as long as Europe remains in financial trouble — threatening the world with another recession — banks are unlikely to feel confident about raising dividends anytime. (In fact, BAC needs permission before it can start offering dividends on common stock again.)

European banks are in a similar position; recently, French banks were told that they could no longer offer the same generous dividend payouts that they have offered in recent years.

Roundup: Happy Thanksgiving Edition

Hope you have a great Thanksgiving (those of you in the U.S. — we know Canadian Thanksgiving is past). Here are a few blog posts from the past week to give you something to do in between turkey and Black Friday:

  1. Implementing a Withdrawal Rate Strategy: Are you looking for a strategy to help you withdraw your money from your retirement account? Oblivious Investor looks at your options, and helps you figure out how to accomplish the best withdrawal strategy for you.
  2. Understanding the P/E Ratio as a Valuation: For those who are looking for more valuation tools, you can use P/E ratio. The Dividend Pig takes a look at what the P/E ratio is, and how you can use it as you evaluate stocks.
  3. When do you plan to be mortgage free?: The Passive Income Earner takes a look at the idea of becoming mortgage free. Do you have a goal to get rid of all of your debt? This might be a good post to check out.
  4. It’s All About the Numbers – Part 2: The Balance Sheet: Dividend Ninja offers a post on how to read a company’s balance sheet. If you want to make the best possible decision when it comes to building your dividend portfolio, the balance sheet is important.
  5. Uncommon Portfolio Diversification: Step outside the box when it comes to diversification. The Dividend Guy offers some great information diversification and asset allocation.
  6. Dividend reinvestment and rebalancing is easier and cheaper with index funds: Monevator takes a look at how you can use index funds to rebalance and reinvest — without paying such high fees. A great help for those looking to change things up a lot, or tweak a little.
  7. Ahead of the Herd with NioGold Mining: Beating The Index shares some ideas about NioGold Mining, and its potential. A information-packed post.

Selling When a Stock Cuts Its Dividend

When it comes to dividend stocks, the general rule is buy and hold. So, a number of people believe that they need to stick with a dividend stock, even after a dividend cut. And, while abandoning a stock at the first sign of a small dividend cut may not be quite your style, any cut should provide you with food for thought.

Reasons a Dividend Cut Matters

When a company cuts its dividend, it matters. It’s true that a dividend aristocrat that stops raising its dividend each year, and falls off the Dividend Aristocrats list, can be a concern. But a company that cuts its dividend – or eliminates it altogether – is something different. This can be an indication that things are going to change, and maybe not for the better. Here are some things a dividend cut can presage:

  1. Losing market share: In some cases, a company that has to cut its dividend does so in response to the way its market share is shrinking. When that happens, that might mean that the company is losing ground – and may not be able to provide the kind of growth that will result in sustainable dividends in the future.
  2. Cash problems: A company that cuts its dividend often doesn’t have the cash to continue to give some of its profits to shareholders. This can mean that revenues have fallen (due to market conditions or to some other problem), or that expenses have risen. It can also be a sign of mismanagement. In any case, cash problems can be an indication that problems are on the way. A dividend cut can be indicative of problems.

Before you get too hung up on dividend cuts, though, consider the situation. Following the global financial crisis, almost all financial institutions cut their dividends. They were all on shaky ground, and cash was a real problem. However, now many banks are starting to raise dividends again – although it might be years before dividends recover. In some cases, a dividend cut is only temporary, and dividends are likely to be raised again. However, if you are relying on dividends for stable income, a stock that regular cycles through cutting and raising dividends is usually not your most reliable choice.

On the other hand, though, it is important to consider that there are companies out there that are managed so well, and have enough market share, revenue, and profitability that they can keep raising dividends, even during times of economic upheaval when other dividend stocks are faltering. (This quality is what makes the dividend aristocrats so attractive to many.)

Getting rid of a dividend stock is a serious decision. A dividend cut might be a sign that the company is in trouble, and it might be time to unload. However, before you decide to sell, it’s a good idea to consider your options, and make sure that you can replace the stock with another dividend stock. One that might provide you with better performance and more reliable dividends.

Make Your Investment Dollars Work Harder For You

Income investors know about efficiency. They know that income comes from two sources: First, by making their money work as hard as it can and second, reduce commissions and taxes to their lowest possible level.

In the case of the latter, it’s a little more straightforward. Reduce your tax liability by holding on to our positions for at least one year and for long term investors, attempt to minimize your dividend payouts in your taxable accounts. For those with taxable brokerage accounts meant for long term growth, contributing the maximum to a traditional IRA and using that account for dividend names is worth considering.

Reducing expenses is easy compared to maximizing the work load of your money. Think of this illustration. A farmer who has 1,000 acres of land buys a high dollar tractor which will allow him to decrease the amount of workers he has to hire. That’s sounds like a great use of capital but what if he only used his new tractor on 500 of his 1,000 acres? Sounds a bit absurd, doesn’t it? It is, but investors do it with their money every day.

Here’s one example. If you have 100 shares of stock in a high volume, relatively low volatility company, you should be selling covered calls from time to time. There are plenty of articles explaining how covered calls work so we won’t dive too deeply in to the mechanics but if you have a stock that is currently towards the top of its range, consider selling a covered call against your 100 shares.

Let’s say that the stock is currently at $45 and that’s the high end of where it has traded. Why not sell a covered call with a strike price of $47? The worst case scenario is that by expiration the stock is above $47 and you are forced to sell the stock at $47. You made $200 plus the premium you collected when you sold the call. You could always buy the stock back or purchase another 100 shares if the stock goes significantly above the strike price.

Covered call options are a more complicated than simple stock buying but it pays to take the time to learn how they work. You won’t make extra money every month but even after paying short term capital gains taxes on the premium you collected, it’s still more money than what you had.

Another way to maximize gains, besides dividends, is to ask your broker if they have a program where they use your shares for lending to short sellers. Often, you will receive 20% to 50% of the lending fee and in most cases you’re not impacted in any way as long as you plan to hold the stock long term.

Bottom Line

Income investors shouldn’t use dividends as their sole source of revenue. There are other strategies that can be used to produce income with various degrees of risk. Of course it’s always advisable to have a paper account where you can practice these strategies before putting real money to work.

Dividend News: UBS Plans to Pay Dividend Again

UBS has been embattled recently, what with a tax probe from the U.S., and with other challenges related to the global financial crisis. As a result, UBS AG (UBSN) stopped paying a dividend five years ago. Now, though, UBS is ready to pay a dividend again.

UBSN plans to return to profitably by focusing more on wealth management, while cutting its investment bank operations, and reducing risk-weighted assets. The move is meeting with general approval, and there are hopes that the situation will improve, and that dividends will be competitive again. The decision to start paying dividends again, after so long, is seen as a step in the right direction.

Other Dividend News

Other companies also have dividend news to announce. Even though the markets have been volatile, companies are still reporting reasonably good earnings for Q3. Most of the market volatility has been about Europe.

  • ACE Limited (ACE) wants to recommend a dividend increase of 33% to its shareholders. Such an increase would result in $0.47 per share, up from the current $0.35 per share.
  • Old Line Bancshares (OLBK) has announced an increase from $0.01 per share to $0.04 per share. This represents an increase 33%.
  • Union Pacific Corp. (UNP) is raising its dividend by 26%, ready to return additional value to shareholders. The quarterly dividend will increase from 47.5 cents per share to 60 cents per share.
  • JP Morgan (JPM) is expected to increase dividends soon. The company has repaid its TARP funds, and the government no longer owns any part of the company. With its financial strength, many expect that JPM will increase dividends soon.

It seems clear that, after some years of hoarding in general, some companies are ready to put that cash to other uses, and shareholders are likely to benefit. Hopefully, we will see more dividend increases in the coming weeks and months as companies try to give back a little more.

Roundup: Dividend and Investing Ideas

Looking for some interesting dividend stock ideas? You can get some great thoughts on investing and more for these blog posts from the past week:

  1. Eagle Energy Trust: Focusing on the Big Picture: Beating the Index takes a look at the big picture when it comes to Eagle Energy Trust. While the Q3 report was somewhat dismal, does that mean the end is near? Before doing anything, take a look at the big picture.
  2. JZ Capital Partners – $1.00 for Sale at $0.40?: takes a look at what is happening with JZ Capital Partners. It’s an interesting look at a company that is struggling a bit. Insight into the possibilities.
  3. Diageo (DEO) Dividend Stock Analysis: Looking for an interesting new investment? Dividend Monk takes a look at DEO. A great, in-depth analysis that should give you some idea of what to expect from this company.
  4. Lockheed Martin Dividend Stock Analysis: Take a look at LMT, a well-known company, from the perspective of The Dividend Pig. A great analysis of where the company is at, and where it is likely to go, and how you might be able to take advantage of the trends.
  5. DivPartisan Updates: Top 20 Stock LIst, Portfolio, etc…: If you are looking for a bunch of dividend investing ideas, Dividend Partisan has a few for you. Look at the portfolio, and the updated watchlist, and you can get a few great ideas for your own portfolio.
  6. The Ultimate Bullet Proof Investing Technique When The Market Goes Bust: The Dividend Guy offers you some helpful insights into down markets. Great investing idea for tough times.
  7. Getting started with DRIPs, and SPPs, Part-1: The Dividend Ninja hosts a great guest post on the subject of DRIPs and SPPs. This article will help you get an idea of where you can go if you are looking to improve your investing plan and portfolio performance.

20 Potentially Undervalued Stocks With High Dividend Yields

Value investing is back.  Investors are flocking to anything with perceived value to avoid the market swings we are seeing every day.  There are many different methods and formulas you can use to identify undervalued dividend stocks.  The dividend growth model is one that we have mentioned before.  Discounted cash flow and comparing current dividend yield to average yields are also often used.

We didn’t use any of those models to identify these three stocks.  Instead we first found stocks trading at a price to book value ratio of less than 1.  We further filtered that list down by removing any stock with a P/E and PEG ratio above their specific industry average.  It’s important to compare P/E ratios to industry averages instead of index averages because not all industry trading at the same level.

After drilling down into value we then sorted stocks by dividend yield to only include those with a yield of 3% or more.  We ended up with over 20 stocks many of which are REITs.  Each of these stocks has a story and it’s important to do your homework to determine if these fundamentals are predicting a big upside or a possible problem at the company.

A good example would be two stocks you’ve probably heard of before – Whirlpool and Computer Science Corp.  Both had disappointing earnings results recently and have analysts concerned about future growth.  Other stocks such as Transocean have solid fundamentals, a high yield and the backing of many analysts making it one of the best dividend stocks on the list.

CompanySymbolPrice /
KT CorporationKT0.826.872.295.25
SK Telecom Co., Ltd.SKM0.926.50.884.95
Sims Metal Management Ltd.SMS0.948.540.53.41
Speedway Motor Sports, Inc.TRK0.6310.542.113.11
Hooker Furniture CorporationHOFT0.869.490.793.98
Brown Shoe Company, Inc.BWS0.957.390.483.17
American Greetings CorporationAM0.815.520.553.69
Seaspan CorporationSSW0.688.920.485.85
ArcelorMittal SAMT0.517.510.383.27
ITT CorpITT0.4320.28
Computer Sciences CorporationCSC0.885.790.673.02
Transocean LtdRIG0.7710.890.546.32
Whirlpool CorporationWHR0.988.340.563.41
Redwood Trust, Inc.RWT0.8811.12.479.3
Starwood Property Trust IncSTWD19.642.149.04
Apollo Commercial Real EstateARI0.858.671.1611.45
Chimera Investment CorporationCIM0.785.212.621.84
Colony Financial IncCLNY0.777.261.218.92
Ashford Hospitality Trust, IncAHT0.548.410.233.88
Hatteras Financial CorporationHTS0.996.893.8115.33

The 5 Best REITs with High Growth

REITs are a great way to get exposure to the real estate market while earning a high dividend yield.  REITs pay out 90% of their income to shareholders to avoid paying income taxes and therefore have very high dividend yields.  Because of this distribution norm these investments usually have a very high payout ratio.

On our REIT dividend list ranks these stocks based on historical performance.  Below is a list of real estate investment trusts that have a dividend yield over 4% and a dividend growth rate over 10%.

Digital Realty Trust – DLR

Digital realty trust buys, develops and manages technology related real estate properties. DLR owns 96 properties which are mostly in the US. 14 of those properties are in Europe. Most of their US property investment is focused in Dallas, Chicago and Boston.

DLR has a dividend yield of 4% and a 5 year dividend growth rate of 20%. They have increased their dividend for 5 consecutive years. DLR is tied for 9th position on our best dividend stock list. They have a 3 year net income growth rate of 36%.

Annaly Capital Management – NLY

Annaly is one of the most popular REITs because it has a high dividend yield and a history of increasing it’s dividend. NLY is a very diversified REIT. They invest in multiple forms of mortgage securities and also manage an number of different properties.

NLY has a dividend yield of 15.4% and a 5 year dividend growth rate over 40%. Their 3 year net income growth rate is 45%.

Two Harbors Investment Corp – TWO

Two Harbors investment trust was incorporated in 2009 so we don’t have a lot of history on them. They mostly invest in mortgage backed securities and related investments.

TWO had a dividend yield of 17.1%. They have just completed their second year of paying dividends and have a year over year increase of 16.25% in 2011.

Anworth Mortgage Asset Corp – ANH

Anworth invests in United States mortgage backed securities. The companies mortgage derivative security investments cannot exceed 10% of their portfolio.

Anworth has a dividend yield of 14.8% and a 5 year dividend growth rate of 107%.

Hatteras Financial Corporation – HTS

Hatteras Financial Corporation is managed by Atlantic Capital Advisors. They primarily invests in mortgage securities that are guaranteed or issued by government agencies.

HTS has a dividend yield of 15.3 and a 3 year dividend growth rate of 44%. They have increased their dividend for each of the last two years.