Dividends Speak The Value of Dividends

1. Dividends SpeakThe Value of Dividends Gayle M Olson Director Northern Lights Chapter, BetterInvesting

2. Choosing individual stocks without any idea of what you are looking for is like bungee jumping with a cord of unknown length.

3. A history of growth From 1928 to 1997 the Dow Jones Industrial Average rose an average of 9.26 percent per year. However, dividend yields accounted for 4.4 percent and capital gains accounted for 4.86 percent of the total annual growth.

4. Growing Dividends There more than 300 companies in the Morningstar database that have increased their dividend every year, for at least ten years, at a rate of 8 percent or more. The average yield of these companies is 3 percent.

5. Growing Dividends Support Share Price “Rising dividend income will ultimately produce rising share prices commensurate with the rising income. If the income doubles, the share price will double. Often it will more than double, as the stock comes back into investors favor. But logic says it will double at least. Even if a stock’s share price were to remain unchanged for decades, the rising income would ultimately give you more annual returns from income alonethan the historical average returns expectable from the stock indices.” (excerpt from “THE SINGLE BEST INVESTMENT” Lowell Miller)

6. Virtues & Profits “Wherever you find dividends, you’re likely to find a better business, a better management team, and higher overall total return prospects than in nonpaying stocks. Not all dividend paying stocks do well by their shareholders, but in the aggregate, you’re much better off sticking to dividend payers than not.” Josh Peters, Morningstar columnist

7. The Dogs of the Dow Investing in the ten highest dividend yielding stocks in the Dow Jones Industrial Average has been a winning strategy over the years. However as it gained in popularity it started to become a self fulfilling prophecy reducing its effectiveness. It is more appropriate for a tax advantaged account because it requires that you replace the lowest yielding with the newest high yielding stocks at the end of each year. This automatically triggers capital gains, possibly short term.

8. 2010 Components of the Dogs The ten stocks comprising the Dogs in the year 2010: DuPont, McDonalds, Home Depot, Boeing, Kraft Foods, Chevron, AT&T, Verizon, Merck and Pfizer.

9. Dow Dogs results in 2010 $1,000 invested in each of the Dogs in 2010 would have resulted in capital gains of $1,428 and dividend income of $422 for a total return of $1,850 (18.5%), compared with the Dow’s return of 11.02%. Note that one fourth of this return was from dividends.

10. Dogs of the Dow 2011 This year’s Dogs of the Dow are: AT&T, Verizon, Pfizer, Merck, Kraft, Johnson & Johnson, Procter & Gamble, DuPont, McDonald’s and Chevron. The average yield for the new Dogs is 4.03%. Procter & Gamble and Johnson & Johnson replaced Boeing and Home Depot from last years Dogs.

11. Soft Landings In 2002 the DJIA fell 20.4 percent. The Dogs of the D0w fell 9.9 percent. Clearly dividends cushion the decline in a bear market.

12. The price the dividend will supportCoca Cola Present dividend /High yield = potential low price

13. Dividend reinvestment plans A company that pays a dividend is, in effect, telling you that you can find a better use for the money than they can. If that were not true they should be investing that money in the growth of the company.

14. Re-invest your dividends When you allow dividends to be re-invested in the same company, you have relinquished control over the price paid for the additional shares. Allow the dividends to accumulate and use them to add properlypriced equities to your portfolio.

15. An aid to forecasts Many analysts rely upon dividend growth to help forecast future earnings and sales.

16. Stocks versus Bonds $10,000 invested in a stock $10,000 invested in a bond A common stock yielding 3 percent would capture $4338 in accumulated dividends in ten years assuming the dividends grew at an average annual rate of 8 percent. A bond yielding 3 percent would capture $3000 in interest in ten years and probably be taxed at a higher rate. In addition there would be no possibility of capital appreciation of principal.

17. Another Example of Dividend Growth Wal-Mart has raised their dividend an average of 19.6% a year over the past ten years. At this rate the current dividend ($1.21) would become $7.25 by the year 2020. This would represent a yield at cost of 13% if shares were purchased at a recent price of $55.

18. $1000 Invested in McDonalds in 2005 You would have bought 31 shares at the average price of $32 that year. At the end of year 5 (2009) you would have captured $204 in dividends, 20 percent of your original investment. McDonald’s dividends grew at an annual rate of 30 percent during that five year period. Your yield on original investment would be 6.4 percent.

19. Payout Ratio The Payout Ratio is the percentage of earnings that is paid out in the form of a dividend. Money paid out in dividends cannot be used for organic company growth so the Payout Ratio percentage must be subtracted from the Return on Equity to arrive at an implied EPS rate of growth. This is another way to calculate a future EPS growth rate.

20. Dividend History (McDonalds)

21. McDonalds payout ratio & dividend growth rate

22. Special Dividends In 2004 Arden Group paid a Special Dividend of $20 per share in addition to the regular dividend of $1.00 per share. That is truly special.

23. Microsoft Special Dividend In 2003 Microsoft initiated dividend payments with an initial payment of $.08 cents per share. In 2004 they doubled the dividend to $.16 cents per share and paid a special dividend of $3.00 per share just in time for Christmas. In 2005 they again doubled their dividend to $.32 cents per share and through 2010 their dividends have grown an average of 30% per year (not including the special dividend) while earnings have grown 12% per year.

24. Implied Growth Rate In the above example the ROE would be reduced by the average Payout Ratio of 13% to produce an Implied EPS Growth Rate of 13.22%

25. Annual Dividend Policy SAP, A German Software Company has paid an annual dividend for years. Many US firms are considering adopting an annual dividend policy because it is more cost effective and they get to hang onto the cash longer. A few US firms already do, but it is more common among foreign companies.

26. SAP Annual Dividend

27. Real Estate Investment Trusts Commonly known as REITs. There are three types. Equity REIT Mortgage REIT Hybrid REIT

28. Equity REIT An Equity REIT invests in and owns properties. Their revenues come principally from their property's rents.

29. Mortgage REIT Mortgage REITs deal in investment and ownership of property mortgages. These REITs loan money for mortgages to owners of real estate, or purchase existing mortgages or mortgage backed securities. Their revenues are generated primarily by the interest earned on the mortgage backed loans.

30. Hybrid Reits Hybrid REITs combine the investment strategies of Equity REITs and Mortgage REITs by investing in both properties and mortgages.

31. REIT Tax Considerations REITs receive special tax consideration because they pay out most of their income to shareholders, offering investors high yields as well as a highly liquid method of investing in real estate.

32. REITs and Investment Clubs REITs are generally not a good choice for an investment club. The dividends are not tax qualified. In addition to this, a portion of the dividend is a return of principal which is taxed at the taxpayers marginal rate. Since the members of a club would probably each have a different tax basis, this would be an accounting nightmare.

33. Dividend Declaration Date The date the directors announce the payment of the next dividend. Following this announcement the dividend becomes a legal liability of the firm.

34. Ex-dividend The ex-dividend date is the date after which the stock trades without the right to receive the next dividend. The share price (theoretically) is reduced by the amount of the dividend, but the reality is that the share price at closing is determined by the actual market activity.

35. Record Date The date on which the firm’s books are closed for the purpose of identifying the owners of a certain class of securities for the purposes of transmitting dividends, interest, proxies and financial reports to the shareholders.

36. Dividend Payment Date The dividend payment date is the date on which the issuer’s paying agent will send the dividend payments to qualified shareholders.

37. The Timing of Dividend Payments An example of the sequence of timing of dividend payments of Procter & Gamble as follows. Declaration, January 11, 2011 Ex-dividend date, January 19, 2011 Record date, January 21, 2011 Payment date, February 15, 2011

38. THE END Thank you for your kind attention