Cash-Rich Companies: M&A, Buybacks or Dividends?

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It’s been an interesting and tumultuous few years. But, through it all, companies with the ability to manage their finances well have managed to do all right. While even the best stock in the world fall when the rest of the market is in a rout, the best companies see their stocks recover – or at least out-perform the other stocks on an index. For buy and hold investors, now is a great time, since it’s possible to find some great deals. But what’s going on with companies?

Because of the economy, many companies have been hoarding cash. It’s a vicious cycle: Companies hoard cash because they want to shore up. They won’t spend the money in hiring until the economy improves, but the economy won’t improve until there are more workers with disposable income. So, in the meantime, companies look for things to do with their cash, since they’d rather put it to work investing in the company than sitting in Treasury bonds at really low rates. Generally, in these situations, the options are:

  1. Mergers and acquisitions
  2. Stock buybacks
  3. Dividend payments/increases

With M&A, the company might get a new division, or strengthen its position by merging with a bigger company. In any case, such situations don’t do much for investors, unless they happen to be the ones holding the stock that increases in value as a result of the M&A activity.

Companies like stock buybacks, though, since it puts their cash to work, and CEOs and other company bigwigs can get a good deal. The interest in stock buybacks right now is an indication that many companies think that their shares are a great value. For the investor with an eye for a bargain, this can be telling. And, if you already own shares, the result of the buyback is often that your shares – as they remain – can become more valuable.

What’s really encouraging, though, is that many companies are considering dividends. Lexmark just announced that it will begin paying a dividend. And with cash reserves at highs not seen in decades, there are a number of companies that some analysts think should start paying dividends. Interestingly, companies that offer dividends often outperform companies that don’t (at least on the S&P 500). Whether it’s because the promise of dividends attracts more investors, or whether it’s because companies know they have to husband their resources better to pay a dividend (or both), companies do well.

And, for dividend investors, now might be a great time to buy. Valuation is lower than it has been in a long time. It’s possible to find good deals, and build your income portfolio. Consider your options, and your goals for the future. Then see if anything appeals to you. Until companies start using their cash to hire workers, and until the economy starts to recover, your best bet is likely to look for solid, cash-rich companies

Roundup: Facts of a Financial Life

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Sometimes, we get so wrapped up in what we’re doing, and what we hope to do, that we sometimes forget the simple facts of life. Whether you are building a portfolio around your desired lifestyle, or whether you are just trying to get your finances in order, it can help to get back to some of the basics — or at least get just the facts. Here are a few things to keep in mind:

  1. Building Wealth – Income and Expenditure: Over at Dividend Monk, Matt takes a look at the most basic of financial concepts. However, it bears reviewing. You want to know the basics of income — and of expenses — and how to make it all work for you.
  2. How Can You Reduce Your Mortgage Payments?: It is possible to save money, reducing your expenses. Over at Dividend Partisan, a guest contributor takes a look at how you can reduce your mortgage payments. Use that money for something else!
  3. Perspective: Dividend Mantra asks us to step back and find a little perspective. Sometimes, where you are at, and what you are doing, depends on your perspective. And sometimes you need a reminder that life can be short, and you need to find your own purpose.
  4. How to lifestyle Vanguard LifeStrategy funds: Monevator takes a look at a strategy to build your portfolio around your lifestyle. Using Vanguard LifeStrategy funds, The Accumulator helps you see how you can build a portfolio around your changing lifestyle needs.
  5. Investing Based on Market Valuation: Oblivious Investor takes a look at the basics of using PE10 for investing. An interest way to decide on what to include in your investment portfolio.
  6. Why Do Utilities Have Such High Debt and High Payout Ratios?: Dividend Ninja takes a look at high payout ratios among utilities. A great, fact-based analysis of utilities in general.
  7. 5 Dividend Champions Trading within 10% of Their 52 Week Lows: The Dividend Pig shares some great information about some good values in the dividend world. Maybe its time to load up a little.

Have You Thought about Dividend REITs?

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One of the great things about being a dividend investor is that you have a wide variety of options available to you when it comes to earning income from your investments. A reasonable amount of diversity in your dividend portfolio is desirable if you want to improve your overall performance – and see some safety in your portfolio. One way to add a little diversity is to include real estate, with the help of dividend REITs.

REITs: Real Estate Investments – without Owning the Real Estate

Many investors want to include real estate in their portfolios. However, it can be difficult to scrape together the capital it takes to purchase real estate. On top of that, once you purchase some sort of real estate, you are stuck with this huge, somewhat illiquid asset. This is where REITs can help. Real Estate Investment Trusts invest in different types of real estate, and you can get a piece by investing in REITs. The up front capital requirements are much easier to meet, you have a more liquid investment, and you can earn an income through dividends.

REITs are required by law to pay out 90% of their earnings to shareholders. This is often done through dividends, and that means that the savvy dividend investor can benefit.

Why REITs are Attractive

One of the reasons that REITs are attractive is due to their yields. With an average yield of right around 3.7%, REITs fit quite well into many investors’ yield targets. Plus, even though some REITs were hard hit just after the financial crisis, many are showing some improvement. After all, any small change in the real estate market can benefit a REIT.

Plus, it is possible to find REITs that are more “defensive.” Even though single-family housing suffered a huge blow during the recession, multi-family dwellings didn’t do as badly. Indeed, REITs that include apartments can do reasonably well during tough economic times since more people are moving out of homes and into apartments – and people are likely to keep paying rent, even if they skip their credit card payments.

On top of offering reasonable yields, REITs also have performance on their side. Even though the last three years have been kind of tough for REITs, over the last 10 years, they have seen an annualized return of 10% (according to the measure of the FTSE NAREIT All Equity REIT index). Compare that to the 2.7% return offered by the S&P 500 (although the dividend stocks did rather better than the index as a whole). And, of course, if there is some recovery in the economy and in the real estate market, REITs have the potential to see some solid growth in the coming years.

Bottom Line

If you are looking for a little more diversity in your income portfolio, and you haven’t begun investing in REITs, it might be time to consider it. You can invest in individual REITs, or you can invest in an index fund or ETF that associates itself with REITs. Either way, you can receive dividends that can boost your income efforts.

The unique tax advantages offered by REITs can translate into superior yields for investors seeking higher returns with relative stability. When preparing your taxes this year, take advantage of this free tax prep program to ensure accuracy while maximizing your returns.

Here’s How to Dramatically Increase Your 401(k) Returns

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Are you a football fan? If somebody gave you $10,000 and said that you had to wager that money on who would be best team of the three, would you pick the Dolphins (0-5), the Broncos (1-4) the Rams (0-5) or the Colts? (0-6) Not a football fan? If somebody gave you $30,000 and said that you had to purchase a car, would you buy one that had been in a wreck, one that had a long history of repairs, or one that was 25 years old with 180,000 miles on it?

Doesn’t sound very fair, does it? If you’re a football fan, you want one of those choices to be the Packers (6-0) and if you’re buying a car, you want one of those choices to be a new car with a warranty. This is common sense, right? If you have to pick a winner in anything, you don’t want to choose from a list of proven losers.
If you have a company sponsored 401(k) plan as your main retirement vehicle, you probably remember choosing from a list of funds and since you’re not in the business of picking mutual funds, the only thing you knew was that you should get a mix of funds.

You can know a winning football team by looking at their record and you know a winning mutual fund by looking at their past returns relative to an index like the S&P 500 but either of those tell the whole story. Mutual funds are complicated and the bottom line is this: You aren’t always offered the best investments. Your company is giving you a very limited choice of funds to choose from and the choice you’re making isn’t much different than the football teams or the cars above.

You Can Fix That!

Here’s what you do. First, you ask your company if they allow for a self-directed plan. A self-directed plan is one where they set up a retirement account at a brokerage of their choosing. In order to meet Federal and state reporting requirements they have to have access to your account so you are stuck using the brokerage they choose.

Second, they probably won’t allow all of your funds to be self-directed. Maybe 50% give or take a little bit. Last, they may charge you a yearly fee of $50 to as much as $300. This seems like a hefty amount in order to do your own work but compared to the big time fees you’re paying in those sub-par mutual funds, you may still come out ahead without looking at performance by choosing products with a low maintenance fee.

Once you do that, find a wealth management advisor to help you. You can do one of two things: You can pay them a flat fee for an annual or semi-annual look at your account or you can pay them for ongoing management of the funds. They will typically charge 2% of your portfolio balance if you prefer ongoing management.
In the end, a self-directed plan managed by somebody with the flexibility to control the fees associated with the products will not only save you money, they will be able to lock in much better rates of return because of the large, diverse range of products available to them.

Bottom Line

You don’t have to keep all of your funds stuck in those losing 401(k) funds. A portion of your money can be self-managed allowing you the flexibility to make a lot more money and retire comfortably.

Schwab Joins the Dividend ETF Fray with SCHD

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It’s been another interesting week of trading on the stock market (although stocks are much higher now), and dividend stocks continue to get a lot of attention from investors looking for the possibility of gains, but with a little lower risk — and maybe some income in the bargain.

One of the trends has been an interest in dividend ETFs. Exchange traded funds have been gaining in popularity recently due to how easy they are to trade, as well as their low costs, and instant diversity. Companies offering dividend ETFs can make big money, and Schwab wants in on that. Schwab just rolled out its high-dividend ETF, the Schwab US Dividend Equity ETF (SCHD). And it’s priced to undercut other high-dividend ETFs from Vanguard.

SCHD will use information from the Dow Jones U.S. Dividend 100 Index to populate its ETF with companies with consistency in dividend payouts, and good financial ratios.

Other Dividend News

There are plenty of dividend rumors right now. Rumors are that BP will pay a dividend for the first time since 2009. Also, there is an expectation that GlaxoSmithKline will boost its dividend to 17 pence a share, with represents a 6.3% increase for GSK shareholders. Additionally, there is also a chance that Spanish insurer Mapfre SA will boost its payout to 7.5 euro cents.

Additionally, LyondellBassell has announced a debt buyback, as well as a special dividend. LYB is hoping to boost its credit rating, and improve its financial footing. LYB is just one of many companies buying back debt right now. The hope is that the debt can then be sold at the record-low rates that are present right now.

Cantel Medical Corp. raised its semi-annual dividend to $0.07 a share from $0.06 per share for stockholders of record on January 17, 2012. For CMN shareholders, this represents a 16.7% increase. The dividend boost brings CMN up to a 0.6% yield.

Roundup: Let’s Take a Closer Look

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Sometimes, before we get too carried away with an investing idea — or any money idea — it’s a good idea to take a closer look. There are a number of ways to do this. In any case, you want to take a closer look at just about everything, from conventional wisdom to attractive-seeming new plans. As you consider what’s next, here are a few posts to get you to take a closer look:

  1. 27 Minute Interview: George Soros Says Markets Are “Always Fallible”: This great video posted at Value Walk takes a look at global markets. Are they always right? Apparently not. Some solid insight.
  2. Herman Cain and his Nein-Nein-Nein Plan: Did you see what The Dividend Pig did with that title? Awesome. At any rate, a closer look at the presidential candidate’s 9-9-9 plan is definitely warranted, and this is a good breakdown.
  3. Dear Investor, Why Are You Paying Those Fees?: Have you taken a closer look at your trading habits and investment accounts? The Dividend Guy encourages you to consider fees — and even consider that sometimes they might be worth it.
  4. Why I Absolutely Love Dividends…: Dividend Partisan considers dividends — and the love of them. Take a look at this post, and examine yourself. Why do you love dividends?
  5. Understanding Dual Fuel: You should understand what you are investing in — at least that’s what Warren Buffett says. Beating The Index brings your attention to the concept of dual fuel. A look at suppliers that provide gas and electricity to customers.
  6. How a Vacation Can Teach You about Financial Markets: You can learn a lot from a vacation. The Dividend Ninja offers this guest post from Barbara Friedberg about how you can learn even while you are supposed to be relaxing.
  7. My Thoughts On An Emergency Fund: It’s one of the most basic financial concepts, but it does deserve a closer look. Dividend Mantra considers the emergency fund — and how to build and maintain one.

Building a Winning Dividend Portfolio: What to Look For

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When it comes to building a winning dividend portfolio, you want to put together something that is likely to last for the long term. This is especially true if you plan to build an income portfolio that will help you accomplish your goals later on. Here are some things to consider as you put together a winning dividend portfolio:

Companies with consistent growth

Choose dividend paying companies with consistent growth. This doesn’t mean that it has to be explosive, huge short-term growth. All you need is consistent growth. A company that grows its earnings regularly, and has future prospects can be solid a bet, both as a dividend stock, and as a company that will see an increase in stock price over time. Also, consider companies that generate cash on their own. These are companies more likely to be able to share some of the profits with investors through dividends.

Costs

Consider the costs the company has. How does it contain them? Look at profit margins and consider companies that consistently show that it can control costs, and make wise spending decisions that benefit the company. Also, pay attention to debt. While a certain amount debt is to be expected in any business, you want to make sure that the level of debt is relatively low and manageable.

Long term performance

How long has the stock been performing well? Look at the long term staying power of the stock. It can also help to look at how much volatility the stock has experienced. You might see some dips and rises, but a solid, long term stock sees its performance smooth out over time. Don’t choose something that rockets higher in the short term, but is likely to drop dramatically as well; instead, look at long term performance.

Dividend increases

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Along with solid long term performance, a record of regular dividend increases can be desirable. Does the dividend increase have to be huge each year to matter? No. Any consistent policy of dividend increases says a lot about a company’s management and its fundamentals.

When looking at your options for addition to your dividend portfolio, it’s a good idea to consider your goals. If you are planning to grow your dividend portfolio long term, and prepare it to provide you with regular income to meet your needs, the important thing is to look for companies with staying power, regular growth, and good management. The stocks in your dividend portfolio don’t need to be glamorous, and they don’t need to make a big splash. In the case of a solid portfolio built to withstand the test of time, sometimes slow and steady can win the race.

Roundup: Updating Your Portfolio

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Are you ready to update your investment portfolio? Now is the perfect time of year to think about rebalancing, and try to figure out what you should do for next year. If you are looking for some portfolio help, here are some great insights from around the blogosphere:

  1. Fixing a Broken Portfolio: Is it OK to Sell Low?: Mike at the Oblivious Investor takes a look at how you can salvage your portfolio. Great ideas on how to tackle a disappointing portfolio and then move on.
  2. What Are You Buying?: Dividend Mantra takes a few minutes to tell you what’s on his watch list. It’s a great idea to consider what you are doing — and figure out what you should be doing next.
  3. Would You Invest Everything in a 6% Distribution Portfolio?: Over at The Dividend Guy, Mike takes a look at a 6% distribution portfolio. As part of his post, he explores Canadian REITs, and their popularity. A great analysis of different portfolio options.
  4. Ah, the real estate market…: Dividend Partisan shares his experience of finally entering the real estate market. A great look at real estate, and where it might going, as well as how to include it in a portfolio.
  5. How small investors can drip-feed into Vanguard index funds: At Monevator, The Accumulator offers some information on how you can do better as a small investor. A great method for making the most of your investment with the help of drip-feeding.
  6. Let The Dust Settle Before Getting Into Apple: Before you jump into Apple following the death of Steve Jobs, it’s a good idea to take a step back. Value Walk takes a look at how you should take a measured approach.
  7. Medtronic (MDT) Dividend Stock Analysis: Over at Dividend Monk, Matt takes a look at Medtronic. A great analysis of a stock that you might consider a “reasonable buy” as an addition to your portfolio.

Should These Companies Pay Dividends?

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All of the recent stock market volatility has stimulated an interest in dividend stocks. Many people are exploring how they can earn a stable income using dividend stocks, since they still pay out, even in a down stock market. Many dividend companies have solid fundamentals, and are cash rich enough that they can share some of their profits with others.

However, just because a company is rolling in cash doesn’t mean that it is sharing some of its good fortune with shareholders through dividends. Here are some of the most famous, cash-rich companies that hold back when it comes to paying dividends:

  • MSI: Motorola Solutions, Inc. has plenty of cash from its ventures, but doesn’t usually pay much back to its shareholders in the form of dividends.
  • EBAY: eBay Inc. is still going fairly strong, and it still has plenty of cash, even though it is famous for making acquisitions and mergers. However, the company doesn’t feel it necessary to share.
  • MA & V: MasterCard and Visa, the credit card payment processing giants, have a solid business model (nearly everyone uses their branded credit cards and debit cards) and loads of cash, but are pretty stingy with the dividends.
  • AAPL: Apple is, perhaps, the most famous of cash-rich companies that don’t pay dividends. The sheer amount of cash that Apple has would be enough to provide a generous one-time dividend for shareholders, or even set up a quarterly or annual dividend. (The company might need to offer a dividend if investors begin leaving if Apple doesn’t do as well without its visionary leader, Steve Jobs.)

These companies might do well to return some of their cash to shareholders. Even in these tough economic times, these are companies that tend to do reasonably well – and are likely to weather most market storms.

How Companies Can Benefit from Paying Dividends

One of the biggest ways that companies can benefit from paying dividends is by attracting investors. More investors means higher share prices. Indeed, dividend stocks usually do well, out-performing non-dividend paying stocks during tough economic times. This is because investors stay in because of the dividend payment, and new investors, looking for solid buys and perhaps a little income, are willing to make purchases.

A company doesn’t even have to offer a regular dividend to benefit from a short-term boost in share price. Can you imagine how excited investors would be if Apple announced that it was going to offer a special, one-time dividend? The rush to pile into Apple by the ex-dividend date would be massive.

You can probably think of several solid, cash-rich companies that you would like to see offer a dividend. And, perhaps it’s time for these companies to wake up and see the way things are going. Dividend stocks are in demand, and they are doing reasonably well. Some of these companies might do well to consider rewarding shareholders with some sort of dividend.

How Buy and Hold Should Really Work

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One of the essential strategies of dividend investing for stable income is buy and hold. When you are investing in dividend stocks, and you expect to build an income portfolio based on these stocks, you, by definition, buy these stocks and hold them for long periods of time.  However, it is important to understand that buy and hold investing isn’t about buying and then holding forever. It’s about buying and holding until the stocks in question no longer meet the requirements you have set for your income portfolio.

Why Buy and Hold Works for Dividend Investors

The main point of buy and hold investing is that you look for a stock with staying power. It should have solid fundamentals, and a certain amount of steadiness. A stock with good fundamentals, including competent management, reasonable profit margins and decent market share, is likely to make it through stock market downturns and difficulties.

Additionally, a good buy and hold stock often (but not always) makes a good dividend stock. A company on solid footing is not likely to cut dividends at the first sign of trouble in the stock market. Indeed, it is more likely to stay the course, aware that, over time, these short term fluctuations tend to even out a bit. This means that your payout is likely to keep coming, even during a recession or a stock market crash. Just look at the dividend aristocrats: These are stocks that continued increasing payouts, even during recessions, for 25 years. Some dividend aristocrats have been following this model for more than 40 years. It makes it fairly clear that these are stocks that do reasonably well, with solid performances over time, and well worth holding on to.

When to Sell a Buy and Hold Stock

Of course, even with some buy and hold stocks, the time comes to let go. Buy and hold doesn’t mean clinging tenaciously to a stock to the point of folly. Instead, it means holding on until it no longer makes sense to do so. As your goals change, you might need to shift your holdings. Additionally, you should also pay attention to the fundamentals of the stock. A change in the fundamentals may mean that it is time to sell a specific stock. This makes sense; then you can the money and invest in something else that makes more sense for you in the long term.

Frequent trades can eat into your earnings, and can cause problems when you are trying to build an income portfolio. Instead, you are better off saving money on commissions and making moves based on fundamental analysis, rather than making panic trades because of a stock market crash. Plus, you are more likely to meet your income goals over time with a buy and hold strategy. Choosing solid stocks to invest in, and building up your portfolio, will provide you with a better chance at creating a stable income stream as opposed to always changing what you hold in your portfolio.