Your Top Five Dividend Questions Answered

I get a lot of great feedback from readers, including lots of great questions about my favorite subject — dividends.

Today I want to give you my answers to the five most common — and most important — questions that I get asked. The first one is very timely …

#1. “Should I be worried about dividend cuts right now?”

Unfortunately, the current environment is forcing some firms to pare back their distributions, especially in the financial sector.

Fannie Mae’s dismal second-quarter results last week — which included a $2.3 billion loss and a dividend cut from $0.35 to $0.05 — is just one example of the kind of news that’s coming over the wires.

In fact, according to data from Standard & Poor’s, the second quarter saw the greatest number of dividend cuts in 18 years. So yes, there are reasons to be worried about weak companies being forced to cut.

But there are also plenty of companies that continue to pay — and increase — their dividends.

Recent examples of dividend hikers include Cummins and CVS.

And seven stocks in the Dividend Superstars portfolio made payments in July.

CVS is just one of many dividend hikers this year …

In my opinion, larger companies, particularly those with longer histories of dividend payments, look far more likely to continue their streaks. These companies have strong balance sheets and have survived plenty of other market cycles.

Bottom line: There are still plenty of places to find solid, reliable yields … you just have to do a little legwork.

#2. “Can you explain all the dates involved with dividend distributions?”

When a company declares a cash dividend — known as the declaration date — it says something like, “This payment will go to shareholders of record as of January 5th, 2007.” In other words, to be eligible for the dividend, you must own the stock by that record date.

To make record keeping easier, and so that investors are clear on just what they’re getting, the stock exchanges (or the National Association of Securities Dealers, Inc.) set an ex-dividend date for each stock that will be paying an upcoming dividend. This date is generally two or three business days before the record date.

If you buy the stock before the ex-dividend date, you’ll get the payment; if you buy it on or after the ex-dividend date, you won’t.

By the way, when a stock begins trading ex-dividend, it will be marked with an “x” in the stock listings of your local newspaper.

#3. “Do you recommend dividend capture strategies?”

In general, my answer is “no.”

As the name suggests, a dividend capture strategy involves buying a stock shortly before it’s going to pay a hefty dividend (i.e. buying before the ex-dividend date), collecting the payment, and then re-selling the stock.

In theory, you’re able to get back what you paid for the shares, and you keep that nice little payment for minimal work. In reality, it’s a lot harder than it sounds:

First, you’ll need to find a stock with a pretty fat dividend. Otherwise, the amount you’re going to capture won’t make it worth your while.

Second, you’ll want to invest a large amount of capital. The more you invest … the more shares you can purchase … the more dividends you’ll capture … and the less of an effect commissions will have on the transaction (especially in today’s flat-rate brokerage environment).

Third, you’ll have to be very nimble. After a dividend has been paid, a stock’s price will often decline by the amount of the payment. And in some cases, the price will even change prices in anticipation of a dividend payment.

In short, it’s very difficult to beat the rest of the market into and out of these events. Plus, we haven’t even begun to factor in all the tax consequences yet!

There are far better ways to make money with dividend-paying issues, including my favorite way to capture lots and lots of dividends — buying and holding quality companies!

#4. “How do stock splits affect dividend payments?”

When a stock splits, all its per-share attributes, including the dividend, simply get divided by the split factor. For example, a stock that pays a $1-a-share annual dividend will pay $0.50 after a 2-for-1 split.

In my book, people place too much importance on stock splits. Sure, splits generally occur after a stock has had a good price run … but they don’t inherently benefit shareholders.

In fact, the only immediate benefit of a stock split is that the shares become more affordable for the average investor to buy in round lots (i.e. 100 shares at a time). Effectively, of course, they’re getting the same earnings power and the same dividends for the money they invest.

#5. “What should I do with the dividends I receive?”

To reinvest or not to reinvest, that’s the question. If you’re mainly interested in producing current income, then you should just cash those dividend checks and enjoy life!

However, if you can put off the immediate gratification, I think you should consider reinvesting your dividends into additional shares of stock.

Why? Because you’ll be harnessing the power of compounding, which allows the money you’ve already earned on your investments to begin earning returns of its own.

Best wishes,

Nilus

P.S. The other question I hear all the time is, “What dividend stocks should I buy right now?” Click here for my answer.

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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates
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