Friday, February 26, 2010

Dividends and Special Dividends

Jennifer Dowty wrote a column Dividend Paying stocks that I found very interesting. Jennifer is Associate Vice President and Portfolio Manager MFC Global Investment Management of Manulife. See her Bio. The title of the article in Investor’s Digest was Dividend Stocks: Buy, Hold and Collect. The Investor’s Digest is a publication of MPL Communications. See publications on their site.

Her picks were stocks that not only increased their dividends, but also have special dividends. She said she screened over 600 companies to come up with 12 picks. There are only 3 on this list that I know about and have reviewed. Over the next while, I will be doing spreadsheets on these stocks and reviewing them.

Special dividends are great, because they can add considerably to the return you receive on a stock. However, there can be problems with them. The first is that you cannot depend on them. The problem maybe just as you really need them, they are not paid. Special dividends are only paid if a company can afford to pay them. Therefore, the chances they will not be paid in a recession are quite large.

The following were Jennifer’s picks: Armtec Infrastructure Income Fund (TSX-ARF.UN), Computer Modelling Group Ltd. (TSX-CMG), First National Financial Income Fund (TSX- FN.UN), Genivar Income Fund (TSX-GNV.UN), Gluskin Sheff + Associates Inc. (TSX- GS), Keyera Facilities Income Fund (TSX-KEY.UN), Le Chateau Inc (TSX-CTU.A), MCAN Mortgage Corporation (TSX-MKP), McGraw-Hill Ryerson Ltd (TSX-MHR), North West Company Fund (TSX-NWF.UN), and ShawCor Ltd. TSX-(SCL.A).

Dividends are often paid based on earnings or cash flow. For example, a company decides to pay out a certain percentage of its earnings. This can cause dividends to rise quite substantially in good times. The problem also is that in bad times, the increases are lower or non-existent. Dividends could also be lowered or stopped. If you have been following my blog, you would have seen dividends in the first year of our current trouble increase still quite well. However, in 2009, dividends increases were much fewer and some of my company’s lowered or temporarily stopped their dividends.

Other things can affect dividend payouts as well. The most common is the Asset/Liability Ratios being too low. Often when companies borrow money, they sign debt covenants. Basically, they agree to have A/L ratios at a particular level. That preferred ratio is usually 1.50, but it could also be at another ratio. That is why I show Liquidity (Current Asset/Current Liability) and Asset/Liability Ratios on my spreadsheets. A low ratio can affect the payment of dividends.

Another thing that could affect dividends or their increases is that the company needs money for some reason. It could be that they want to expand their business or they might want to update or need to repair some existing facilities. If you are depending on dividends you should paid some attention to a company’s announcements and also read some of their annual statements that refer to future intentions.

It is great to review someone else’s picks. You never know what gems might appear. Besides, the world continuously changes. In 50 years time, what are great stocks now might no longer exist. Same as the stocks of 50 years ago, few are around or are the same anymore.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website at www.spbrunner.com/stocks.html for a list of the stocks for which I have put up spreadsheets. Also, look at other investing notes on my website at www.spbrunner.com/investing.html. Follow me on twitter.

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