Monday, December 04, 2006
Bread Butter and dividends
Stock returns aren’t so great, but the dividends are
Let’s get this straight. The stocks known for their best overall performance did not become the most rewarding stocks because of the amount the stock price rose. Usually the increase in share price is only half of the whole equation.
The most important part to a long term investment is its DIVIDEND. A dividend is an amount paid to shareholders as their share in the company. Dividends are sent out by how many shares you own, if you own 100 shares of a company that pays a $.25 annual dividend you will receive $25 each year just for holding the stock. This is your share of the money the company made over the year prior.
Corporations are not required to pay a dividend and many take this option. High R&D spending companies will opt in favor of cutting dividends or paying no dividend at all in order to boost their product line. Technology companies are a perfect example of a stock category that pays little to investors for holding their shares. In the technology sector, products are only hot for a few years if even a few months so the tech companies must constantly push out the best product possible. Google is a perfect example of a company that does not pay a dividend. The earnings are simply invested within Google to produce shareholder value rather than deliver payments to investors for possible investment into other companies or sectors.
Dividends are usually between 1-10% of the stock price paid back to investors each year. The board of directors of each corporation will set the frequency and amount of each dividend but usually the dividends are paid quarterly to investors. There are other dividends called special dividends. These special dividends are simply payment from the corporation that was not expected. When a corporation sells a large part of its business or pockets a one time profit, the money is usually dispersed to the shareholders as a special dividend. Obviously the money can be kept by the corporation but is most likely dispersed to shareholders, or is used for the corporation to buy itself back, or to pay down debt.
Paying down debt is another reason some corporations would choose not to pay a dividend. Debt reduction will aid returns to shareholders in the future so it may be seen as a priority to the corporation to get the debt reduced or eliminated. Interest charges are always a big expense to most modern blue chip companies. While no corporation can avoid debt entirely, actions can be taken to reduce the debt at hand and lower interest charges. Later this will bring more shareholder equity.
Dividend stocks have become far more interesting since the US laws recently changed the taxed amount on dividend payments. All dividends are taxed at a 15% rate regardless if the payment is one dollar or one million dollars. Lowered dividend taxes are a big reason the markets have been flourishing as of late. Stocks are more lucrative because the checks are not eaten up by taxes. A 15% tax is much lower than the income tax of most people in the United States. Low taxes mean more interest and more money into the markets and later brings financial gain to all who are invested. As we know, in order for the markets to gain ground, the amount of money invested must rise an equal amount. This has encouraged investors to take positions in high yield companies to boost their portfolio.
Dividends are what have made Phillip Morris, now Altria, the best performing stock ever in the US markets. Reinvesting dividends are the best way to make a huge gain in your portfolio. Often, dividends are dismissed as tiny checks that make no real difference to a portfolio. However these payments can take the return of your portfolio up one or two percent each year. While this may only be seen as a percentage point or two, the effect this leaves on your portfolio with compounding can be enormous.
Below are fadskjfdskafjs stocks to consider investing:
Southern Copper PCU 10.2% dividend yield
This stock is the best bet in my own opinion. The company has copper mines in both Peru and Mexico. Southern Copper is one of the largest producers of copper which is up over 400% in just one year. Copper is an extremely versatile metal and is slowly becoming a rare commodity on the markets. Copper is used in thousands of high demand products, especially in the technology business. Copper is so valuable that thefts of wiring and even air conditioners have occurred simply because both contain a high amount of copper that can be sold to scrap metal yards and copper refiners. The numbers speak for themselves. Currently the international inventory for copper is just three days worth of production and finding a replacement for the metal will not be easy nor immediate. Much like oil, a problem in the supply of copper could send copper prices through the roof, which is already five times higher than last year. Simply, copper is in high demand with low supply and this company has everything going for it. A 10% dividend yield sweetens an already awesome investment. One downside for this investment may be the future growth for Southern Copper exists only in the rising copper prices. But as the markets have shown, copper prices are highly volatile and will stay at high prices. I don’t think we will see a slowdown in copper because of sheer supply and demand. Copper will forever be in demand and the supply won’t be getting any bigger any time soon.
Ship Finance International SFL 9% dividend yield
This company has a very interesting business model. It buys oil tankers then sells long term leases on the tankers. But the company takes precautions and never has un-leased inventory. Ship Finance International does not buy a tanker until it has a leased signed in hand for 8 to 12 years. The company also receives 20% of the profits from the tanker over its $28,000 daily rate. The company is protected from falling shipping prices because the leases are signed for 8 years at a time. While the company is protected from harm, it can still reap the rewards when the tankers earn more than the daily rate. Analysts have concluded that investors are not particularly interested in the stock because fears of falling shipping rates. This is no matter to SFI as the company has already locked in its profits for years to come. SFI pays a 9% dividend yield as of its latest share price. This yield alone will double your money every 8 years even if the stock gains no ground.
Washington Mutual WM 4.8% dividend yield
There isn’t much to say about a company like this. Washington Mutual is older than dirt and just another financially sound bank. Everything is right about this stock, the only problem stems from news of a slowing real estate sector. Washington Mutual has been unable to break into the upper 40s. The only problem I see is purely technical. Earnings have yet to cease and the company has great balance sheets. The 4.8% is a modest dividend yield for such a high class stock. 4.8% is icing on the cake, this stock would be a buy even with no dividend.
Regal Entertainment Group RGC 5.8% dividend yield
The Wal-Mart of theaters. Regal operates 6400 screens in the United States. The company was created when two other theaters were merged together after emerging from bankruptcy. Regal leads the way with innovation, handing out pagers to keep unruly audience members from ruining the shows. Regal Entertainment Group works hard to keep patrons coming back. Reward yourself with a 5.8% yield on top of an already stable company!