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When Do Dividends Get Paid?

Dividends are typically paid each month or quarter.  International stocks typically pay dividends annually. 

Dividends must be declared by the board of directors of a company each time they get paid.

There are four important dates to remember:

Declaration Date:

This is the date the board of directors announces their intention to pay a dividend.  On that day, the company creates a liability on the books and now owes the money to the stockholders.  The board will also announce a date of record and  payment date.

Date of Record:

This is the date on which the company reviews its records to determine exactly who its shareholders are.  An investor must be a holder of record in order to receive a dividend payment.  Only owner of the shares before the ex-dividend date will receive payment.

Ex-Dividend Date:

The ex-dividend date of a stock is the single most important factor to consider.  In order to receive a stock’s upcoming dividend, an investor must purchase shares of the stock prior to the ex-dividend date.

Payment Date:

This is the date the dividend will actually be given to the shareholders of record.

Do your homework as you don’t miss important dividend payments especially if the stock pays dividends periodically.

For example: If you visit: www.dividend.com, and check out Microsoft (MSFT), review the dividend information listed to get the actual ex-dividend and payment dates.  The next ex dividend date is November 14^th, the date of record is November 15th and the dividend will be paid on December 13th. Most financial websites will provide this date along with other information.

Evaluating the Dividend Safety for Dividend Growth Stocks

Investing in dividend paying growth stocks can provide needed income and still grow your portfolio to outpace inflation and taxes over time.

What makes an ideal dividend growth stock?

1. The company has a sufficient dividend yield, not one that implies risk to the payout (i.e. financially-engineered), but one that is supported organically.

2. A strong company with solid fundamentals (an attractive Economic Castle rating) that generates outsize economic profits.

3. The share price is going up (i.e. the market has conviction in the idea)

4. The company covers its dividend payment with copious amounts of free cash flow from operations (CFO) less all capital spending.

5. It has a large amount of net cash on the balance sheet that can be used as reserves in case it encounters trouble.

6. The company is undervalued on the basis of a discounted cash flow process and a relative valuation process as well.

7. The firm’s management has a strong willingness to keep paying an increasing dividend, as measured by its dividend track record.

8. The idea has a solid Dividend Cushion Ratio™ (a measure of the safety and growth potential of the dividend.

The Dividend Cushion Ratio™ was developed by my research partner, Brian Nelson, CFA of Valuentum Securities, Inc.

This is an objective cash flow based fundamental ratio that gauges a company’s ability to continue raising its dividend long into the future.  It is not based on historical dividend patterns which is not a true indication of a company’s ability to pay its dividend, only a historical reference.

It is pure cash flow dividend coverage that considers the health of a firm’s balance sheet, which is a key funding source for dividend expansion.

The formula adds five year forecast of free cash flow (CFO less capital expenditures) to net balance sheet (cash less long term debt) and divides that sum by five year forecast of expected cash dividends paid.

The bigger the positive number above 1 the better. Anything less than 0 (a negative number) signals trouble.

This is a more comprehensive measure of growth and safety than using the payout ratio (dividends per share divided by earning per share).  We evaluate the dividend cushion ratio on all security decisions.

Let’s look at Microsoft Fiscal Year End 6-2018) for example to understand the numbers:

What does this mean for Microsoft with a dividend cushion ratio of 3.6 (FYE June 2018?

Microsoft could cover its growing dividend with expected free cash flow and its net cash flow and its net cash position more than 3.5 times over the measurement period.

Bottom Line: The company has positive dividend growth prospects on the basis of its free cash flow profile and net balance sheet.

Craig is an independent money manager and advisor.

Securities and Advisory Services offered through Commonwealth Financial Network,

Member FINRA/SIPC. A Registered Investment Adviser.

 

This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product.

 

Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met.

 

 

 

 

I wanted to extend my thoughts on market volatility and how to prepare for the future.  No one can argue that volatility has picked up quite a bit of late and frankly you should not be surprised.

The times of just buying the market index via indexed or exchanged traded funds and expecting to make a lot of money is over. What you are essentially doing to buying stocks regardless of price regardless of underlying valuations are potentially going to suffer.  The 800-point drop in the Dow Jones Industrial Average on October 10^th was just eerie.  Outside of the 10-year Treasury yield marching higher, there was no good fundamental explanation for the drastic change.

My point is the times of just investing in the market at will and expecting continued bull market returns from the last nine years are simply not now the case!

This is why intrinsic value analysis of a stock is so important. It’s imperative to evaluate the fair value estimate range to get a feel of the riskiness of a company’s fundamentals.  Does a company produce strong free cash flow that has limited debt and future ability to cover and increase dividend payments, stock buy back programs or reinvestment and or expansion of the company’s operations?

We are moving into a stock picker’s wheelhouse.  Outside of technical trading (attempting to make profits on short to medium term price movements), the long-term practical answer is choosing companies with pristine balance sheets, strong cash flow, little debt, intrinsic fair value based on relative valuation assessment and economic moat (terms endured by Warren Buffet that means a company has technology, size or competitive edge that makes it near impossible for a competitor to infiltrate their economic position.)

Owning the best stocks given the criteria above will serve investors well as we will be faced with a likely market downturn.  I can’t say with precision when this will occur so be cautious and make the appropriate changes now. 

I also suggest to have a mechanism to potentially sell stock positions should the economic conditions warrant such a move.  Buying and holding long term can be detrimental to your capital.  One simple way to track your stocks is to study the 200-day moving average technical indicator.  This line essentially smoothes the last 200 trading days in a line in contrast to the current stock price. If the stock price is trending below this 200-day indicator, it can serve as a warning to closely watch that stock for future action.

My last column suggested alternative investments that may help dampen volatility and help lower the probability of losing money during a bear market. I also suggested that you think about the amount of cash in your portfolio as a defensive position.  If you are taking income from your portfolio, I would definitely consider raising the level of cash at this time to a level of comfort for you.

Even if your objective is capital appreciation, you always have to make sound portfolio decisions to preserve your capital over the long run.

Keeping it simple, if we need a 4% drawdown rate on your capital and add 3% for long term inflation, you need to get 7% rate of return on your money.  Investing in bank or bond instruments will not get you the 7% return in general.  A lot has to do with the total amount of capital you are working with.

The bigger issue is that if we experience a bear market, you cannot afford to lose a lot of capital because it will take too long to recover and now your getting income on a lessor amount of capital which probably will not cover your expenses. 

Let review the chart below to understand the recover dynamics:

Recovery Period for Losses

 

50% Loss =  100% Gain

25% Loss = 33% Gain

10% Loss = 11% Gain

Losses are far worse than gains!

 

The key takeaway is that your portfolio should be structured to suffer no more than a 10% loss.

Otherwise, you may experience financial hardship to maintain your lifestyle.  Given the current volatility of the stock market and in my opinion, a pending bear market sometime in 2019, I urge you to evaluate your portfolio now!  This is the best gift I can give you.  As I mentioned in my last column, there are other methods to help make your portfolio more defensive in nature. 

The other point I need to make is that risk adjusted portfolios do have the propensity to lose a lot of value as well.  Moderate portfolios such as 60% equities and 40% bonds may suffer more than a 10% loss during a bear market.

At this stage of your life, preserving capital while maintaining your income is the most important key for your money. 

 

This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation or a recommendation to buy or sell any security or investment product.

Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors and there is no guarantee that any investing goal will be met.

All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results.

Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is no guarantee of future results.

 

 

On everyone’s mind right now is the volatility in the stock market.

The key to maintain your sanity is having a balanced investment portfolio based on your own risk tolerance. Balance is the combination of fixed income, equity and cash in general terms.  We can drill down to specific types of fixed income and equities as well.  The use of alternative investments including annuities, real estate, private equity and other investment can provide a real hedge to create negative correlation to the stock market.  This means that your portfolio would not perform in tandem with the market performance and create more stability of returns and risk.

We must keep a long- term perspective on investing.  Let’s examine the recovery data from stock market declines since 1945.

The Deeper the Stock Market Decline, the Longer the Recovery (Declines in the S&P 500 index since 12-31-1945)

 

S&P 500 Price Declines (December 1945 Through July 2016)

	Number	Average Drop From Peak (%)	Duration (Months)	Time to Recovery (Months)
Type of Decline
Pullback (5.0–9.9%)	56	-7	1	2
Correction (10.0%–19.9%)	21	-14	5	4
Bear Market (>20%)	12	-33	14	25
(20%–39.9%)	9	-26	11	14
(>40%)	3	-51	23	58
Source: CFRA and S&P Dow Jones Indices.

As you can review, for all market downturns that experienced a pullback or correction, the recovery time was extremely quick. Even bear markets up to minus 39.9% recovered within one and one-half years.

This assumes that your portfolio is completely invested in the S& P 500 index which is probably not the case.

I hope this chart helps to ease your mind in terms of the noise and news coverage. 

 

The key is to make sure that the risk component of your portfolio is in line with your specific risk tolerance.  Most advisors have access to some type of risk assessment software illustrating what happens in a down market or to share historical performance during different time periods of negative performance.

Portfolio construction is paramount in terms of market exposures for both equities and fixed income.

 

What are some options to help protect your portfolio from some downside risk?

 Adding alternative investments are those that do not fit into the standard equity or fixed income classifications. These investments typically offer additional attributes in their investment profiles such as low or non- correlation or other facets that help move the overall portfolio down the risk spectrum. The inclusion of these alternative investments maybe worth considering in a more balanced portfolio as a means of potentially lowering overall portfolio volatility. Alternative asset classes consist of, but are not limited to, managed futures, long short funds, multialternative, market neutral, global macro funds, merger arbitrage and other hedged type funds.

You may be able to protect some downside risk but also please remember that you will not participate in the full market performance on the upside.  This is one the trade-off of adding alternative investment options.

These investments are not suitable for everyone involve special risks, such as risk associated with leveraging the investment, utilizing complex financial derivatives, adverse market forces, regulatory and tax code changes and illiquidity. There is no assurance that the investment objectives will be attained.

I am not making any specific recommendations. This is strictly educational information. Please discuss with your advisor whether you should add alternative investments to your portfolio.

 

Let’s take a look at how some of these strategies work:

Market Neutral funds:  This type of fund includes covered call writing and convertible arbitrage and are intended to provide fund with enhanced potential for risk managed returns due to dampen volatility. The downside of this investment includes high risk due to their investment strategies relying on the use of leverage, short selling and arbitrage to achieve the desired outcomes. This type of fund typically has low correlation to the fixed income markets.

Long/Short funds:  This type of fund seeks risk adjusted and absolute returns across the global equity universe. It utilizes a global long/short strategy to invest in publicly listed equity securities.  The downside of this investment includes high risks due to alternative investing techniques such as leverage, derivatives and short positions.  They often have higher fees and have less liquidity than standard mutual funds.

Other alternative investments include but are not limited to:

Real Estate Investment Trust (REIT):  This type of non-traded real estate investment is an option because it provides less correlation to the stock market and can provide monthly income from regular distributions.  They are generally illiquid securities for which no public market exists.  As such, investors may be unable to liquidate the security at any price.  Real estate investments are subject to a high degree of risk because of general economic or local market conditions; changes in supply and demand; competing properties in the area; changes in interest rates; and changes in tax, real estate, environmental or zoning laws and regulations.  Real estate units/shares fluctuate in value and may be redeemed for more or less than the original amount invested.  There is no assurance that the investment objectives will be attained.

Annuities: This type of investment can offer a role to reduce market volatility due to the contractual guarantees. The guarantees are based on the claims paying ability of the issuer.   Due to the vast offering in the marketplace, it is imperative you identify what is important to you and then search for an annuity that meets your criteria. 

Annuities are long term, tax deferred investment vehicles designed for retirement purposes.

How will your portfolio react should we experience another 2008-9?  There are ways to back-test your portfolio to examine what happens should the market suffer large losses again. Understanding the actual risk on your money is just as important as the return on your money.

It is also key to grow your money to combat future inflation and taxes. Future health care cost will be the most pressing issue.

Now is a great time to review your portfolio to make sure you are doing everything that makes sense to provide a successful financial future.

 

This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product.

Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met.