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It was the best of times for dividend investors
In my last post, I discussed the complicated world of dividend payments.
(It may help to refer to my last post on dividend-payers and its predecessor before reading this new one.)
Continuing from the previous, when it comes to dividend payments, what we have to remember is:
Since the dividend payments have already been paid and taxed (if held outside a registered account), then your adjusted cost base (ACB) for accounting purposes, and, more importantly, for paying taxes on your investments, already takes the dividend into consideration.
What the charts and ACB don’t tell you
When you look at charts, since they don’t add the dividend amounts on to the listed return, it looks like you made less than you did. You have to take the return on the investment plus the dividend it paid to get a real picture of your investment.
In a great year, like this last year, it doesn’t matter as much, but in years where the stock only appreciates a little, say 1 or 2 per cent, a 4 per cent dividend looks great.
If you bought 100 shares, originally, and reinvested your dividend payment each time it was made, those payments will become part of your ACB. Let’s use a very simple example to review how this works.
Okay, one more time, from the top
If you held 100 shares and received four dividend payments that equalled 1 share each, you’d now hold more shares:
100 + 1 + 1 + 1 +1 = 104 shares
If the share / unit price were $62, your investment would be: 104 shares x $62 = $6,448. The dividends paid in 2013 will be taxable. In the example above, three of the dividend payments will be taxable on your 2013 tax statement while one of them would have been paid the year before since it was paid in 2012. (Again, this is only true if the investment is held in a non-registered account.)
In Paid for faith and paid to wait: Have you thought about this regarding your dividend paying investments?, I discussed what happens with dividend-paying stocks. Key is the way dividends are accounted for (in a non-registered account, e.g., outside of an RRSP or TFSA).
When a dividend is paid (refer back to the example above), it becomes part of your cost when reinvested because you have bought new shares or units. So, in the above example, where you hold 104 shares, all of those shares are you’re ACB.
$6,448 becomes your ACB. Not the $6,200 of your original investment. The $248 of dividend payments are added to your cost.
This works in your favour at tax time:
If held outside of a registered account, the dividend payment is tax preferred and you’ll pay a lower rate of tax than if it were normal income. For example, you’ll pay a higher tax rate on your salary, on GICs and other deposit investments which pay out normal income.
Let’s take a quick look at history … Way back in December 2011, I posted about the favourable climate for dividend-payers – especially U.S. dividend stocks. You’d be a happy investor right now if you’d made investments in quality dividend stocks back then — U.S. or Canadian.
It was the best of times (for dividend investor returns): the irrefutable metric of the past
As always, the future is unwritten, but the past is fact because we can measure it. I began this series of posts a while ago. If we update it to the time of writing, we find:
One of the most conservative of indices, the Dow Jones Industrial Average (DJIA) returned approximately 33 per cent since that time. The broader S&P 500 returned about 47 per cent (although the index does have a lower dividend payout and is somewhat ‘growthier’). Still, it was indeed one of the best of times for dividend-payers.
Royal Bank? About 62 per cent.
Even more impressive? Those returns quoted above don’t include dividend payments. Your return including those payments would’ve been even higher.
Here’s a chart showing dividend activity for Royal Bank over the same period of time:
For Canadian investors, it might be interesting to consider that the Canadian dollar dropped in value over this time as well. If you held U.S. investments, the strength in the U.S. dollar added to your return on those investments. Since its recent peak in July 2011, the Canadian dollar has dropped from $1.05 U.S. to about 90 cents U.S. (a drop of approximately 16.7 per cent if you want your 90 cents to grow back to 1.05).
The change in currency added about 6 per cent to the DJIA’s return for Canadian investors and about 8.6 per cent to the S&P 500.
Not bad.
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This work and all work on this blog is licensed under a Creative Commons Attribution-ShareAlike 3.0 Unported License.
NB: Royal Bank stock used for illustrative purposes.
Image: Flickr, Daily Dividend.
Related:
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Paid for faith and paid to wait: Have you thought about this regarding your dividend-paying investments? <<JohnBlog – johnrondina.wordpress.com
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Help! I can’t understand if I’ve made money with my dividend-paying investments! << JohnBlog – johnrondina.wordpress.com
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The grand parade of future dividends << JohnBlog – johnrondina.wordpress.com
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One stock is the loneliest number when it comes to investing << JohnBlog – johnrondina.wordpress.com
Paid for faith and paid to wait: Have you thought about this regarding your dividend-paying investments?
In Help! I can’t understand if I’ve made money with my dividend-paying investments! I blogged about the difficulty some investors have with dividend payments. What are dividends? How do they function?
Using the dividend data from my previous post …
If I made money, why doesn’t it show?
It does. You have to understand what’s happening when you get paid that dividend.
(You might want to review the previous post above.)
Here’s what it looks like:
Each time your dividend of .63 cents per share is made (.63 cents x 100 shares = $63), your $63 dividend payment is subtracted from the share or unit price of the investment. If the share price was $62 when the dividend was issued, and the dividend was issued at .63 cents then the share or unit price is now:
Share price – dividend issued
New share price:
$62 – .63 cents = $61.37
The new share per unit price is $61.37 ex-dividend (after the dividend payment is made).
Paid for faith = Paid to wait
Some people have trouble understanding this change in the stock or unit price of the investment. The point is, the company has paid you for your faith in investing in it. (In our time of give-it-to-me-right-this-second, faith in the long-term future is a sadly diminished concept.)
The company has also paid (most probably) millions of other shareholders, so the share or unit price must go down by the amount paid out as a dividend. This affects your Adjusted Cost Base (ACB).
The dividend has been paid to you. You’ve already received it. It’s your choice whether you reinvest it into that same investment (over the long-term a good strategy) or take it in the form of cash and buy another investment with it — or spend it. However, spending this cash goes against one of the mantras of investing, which is, reinvesting your capital for the long-term.
What are your goals?
Cost is relative
Because you were paid the dividend amount, and if that amount is held outside of a registered account, e.g., an RRSP, the dividend payment becomes part of your cost:
$62 + a dividend payment of .63 cents as above makes your ACB: 62 + .63 = $62.63.
If you received four dividend payments of .63 cents that would be 4 x .63 = $2.52. Now your ACB would be $62 + $2.52 = $64.52.
Time in
This is where people get confused. Because the ACB includes the dividend payouts, the payouts that are recent skew your cost base. The new dividend investment hasn’t had time to make much money, and so, it reduces the “look” of the performance of your shares.
Sometimes, especially if it’s a new investment, it looks like you’ve made less than you have.
Remember:
- That dividend payment may add to your ACB, but it is money you “made”, money you didn’t have before
When you have a newer investment or in a declining market, this effect is amplified. But if you have a quality investment, this is short-term thinking. Resist short-term thought.
Declining market? New investment?
- Your dividends are being paid out, and you’re buying at cheaper prices if you’re repurchasing stock / getting new units of a fund during a correction (the difficulty is trying to understand when the correction will end)
- With a new investment, you haven’t had much time to profit, so the dividend payments are going to add to the ACB and make it look like you’ve made less than you have unless you remember you received that dividend payment every month, quarter or year
- If you project out over three, five or ten years, you get a lot better idea of how those extra shares you reinvested in through your dividends increased over time (assuming an increasing market)
- Even if you received your dividend as cash, you still got something you didn’t have before
Think like a business owner when it comes to your investments.
Life, business, investing – it all moves in cycles. Have the patience to wait, and the wisdom to filter out hype and noise.
Like the recurring circle of kids on their way back to school in fall, there are certain near-immutable laws and cycles that investors must consider.
Whatever the stock does, the dividend payment’s in your pocket
When investors sit down to look at their statements, even if their accounts are registered, the ACB appears to make it look like they haven’t made money in the short-term. But often, they have.
Remember, if the investment paid out a dividend this year of, say, 4 per cent, you made that 4 per cent. The investment would have to drop 4 per cent (of course, there are management fees to mutual funds and ETFs, and you have to subtract those*) for you to break even.
To sum up:
- Remember, the share price will be reduced every time a dividend payment was made by the amount of the dividend payment (but you still received that payment in cash or through the purchase of more shares)
- You now own more shares because of the dividend payments
- Because you own more shares, if the price of the investment continues to go up, those additional shares will increase in value
It’s important to note that during real dividend payments (rather than our example), there may be more variation because of the numbers involved, but this example will give you an idea of how dividend payments operate and what a stock or unit price looks like ex-dividend (after the dividend has been paid).
In a year like this last, the returns have been excellent (the Dow Jones Industrial Average and S&P 500 are up over:
- 26 and 30 per cent respectively since the low of June, 2012, and that’s without including dividend payments**).
You can expect to have made money even on some of the new money invested through the new dividend payments into new shares or units.
In my next post in this dividend series, get an example of what this looks like, including a chart.
Want to contact me? Go here.
This work and all work on this blog is licensed under a Creative Commons Attribution-ShareAlike 3.0 Unported License.
Image: Flickr, Daily Dividend.
* Mutual funds subtract these fees before flowing gains to investors
** At the time of writing, and, in U.S. dollars
Related:
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Help! I can’t understand if I’ve made money with my dividend-paying investments! << JohnBlog – johnrondina.wordpress.com
-
The grand parade of future dividends << JohnBlog – johnrondina.wordpress.com
-
One stock is the loneliest number when it comes to investing << JohnBlog – johnrondina.wordpress.com
How to achieve transcendence in business: Believe in others
What motivates people at work?
In a post-recession environment where employee engagement plays a major role in organizational success — up to a 250 per cent boost to the bottom line — attention to motivation and engagement demonstrate greater loyalty from employees. A focus on innovation sets organizations apart. (See below infographic.)
What does innovation look like with respect to employees?
Feel valued. Feel engaged.
From the employees point of view:
- Believe in me
- Believe in others
Recent data from a Dale Carnegie engagement study, which focused in part on “belief in senior leadership”, found:
- 69 per cent of disengaged employees would leave their current job for just a 5 per cent pay increase
Organizations that believe people are intelligent, self-motivated individuals that do good work outperform. Collaborative work, like many things, thrives when management prioritizes it. Minimizing employees’ knowledge and efforts is counterintuitive.
Brilliant work comes from treating people like they’re brilliant. But how do you get those diamonds to shine?
Creating a culture where employees are underappreciated, creates an environment where employees:
- Give less
- Find another way to feel appreciated
- Move on
Invest in relationships
Business is about relationships. Relationships need investment just like anything else you want to grow. That’s as important internally as it is externally.
Every company is trying to get the best out of its employees. Because every company faces the costs inherent in employee turnover.
Disengaging from employees is disengaging from operating margin
Towers Watson studied 50 global companies and found:
- Companies with low engagement scores had an average operating margin just under 10 per cent
- High traditional engagement had a higher margin of 14 per cent
- Companies with what Towers defines as the highest “sustainable engagement” scores had an average one-year operating margin of 27 per cent
The Carnegie study found companies lose $350 billion a year because of employee disengagement. One-third of a trillion dollars lost to employee disengagement.
What do companies want to achieve? Three things they don’t want is less productivity, increasing turnover or gifting employees to competitors.
Engage to innovate, innovate to engage
Employees of companies that outperform when it comes to innovation said in a Hay Group survey (see infographic below):
- A majority of executives intend to create employee incentives to encourage collaboration across functions (79 per cent)
- My company evaluates or rewards leaders based on their ability to build excellent relationships with peers (95 per cent)
- 91 per cent of best-in-class companies regularly reach out to employees for ideas on creating efficiencies
Watching a former employee later excel with a competitor is painful. Long-term strategy regarding employee engagement and innovation should embrace the strengths of employees.
Forgetting to invest in meaningful work for employees comes with its own negatives. How do we know?
Because according to 95 per cent of employees at top companies, leaders work hard to connect people with projects that are personally meaningful to their employees.
Believe in your employees. Transcend the mean and shine.
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This work and all work on this blog is licensed under a Creative Commons Attribution-ShareAlike 3.0 Unported License.
The new portals are online, social, and big enterprise is buying in, again
Is activity in online marketing slowing down? Not for Salesforce.com.
Salesforce decided to put their foot to the pedal with the $2.5 billion acquisition of ExactTarget Inc. ExactTarget is the latest, but high-profile deals have been happening for awhile.
Big marketing
Big enterprise software companies are jumping into online marketing.
ExactTarget provides email marketing services to clients. Eloqua was swallowed by Oracle last summer. Eloqua’s involved in managing and measuring the effectiveness of organizations’ marketing efforts.
Salesforce, Oracle, Microsoft and IBM are managing change becoming more social and more collaborative.
This deal does put the other large software vendors in the hunt for marketing assets … When the proxy on this deal comes out, I think we’ll see they were all in the bidding …
— analyst Pat Walravens of JMP Securities
The competition for assets amongst the big software vendors is alive and well. At a 52 per cent premium, and the largest for Salesforce, will the acquisition pan out as profitable?
Salesforce is paying 5.5 times forecast 2014 revenue, less than the 6.1 times forward revenue Eloqua cost Oracle, according to Walravens.
Change is disruption is change
Online shopping is driving change. Change is leading marketers to look at data in a big way. Consumers are empowered. The buying process and shopping, affected by the winds of technological change, is forcing change on business.
Data has fuelled providers like Radian6 and Buddy Media. With shoppers going social, companies want to listen. Providing for the needs of consumers is also about providing for the wants. The empowerment of the consumer has reinforced listening as a profound tool for marketing.
Reputation and perception factor into the equation. Consumer perception of reputation and brand have burst into the organizational atmosphere like an asteroid.
Power are the people
Consumers have opinions. Their opinions spread digitally. Listening provides valuable insights gained from focusing on customers.
If 80 per cent of online content is user generated (infographic below), then shrinking away from listening to consumers is the kind of arrogance that leads to crushing falls in stock valuations, mistakes in product development and customer service debacles.
Stories focus on how marketing and IT will work more closely together. Trends are toward collaboration and trust.
The hidden vampire
Silos can form even within marketing departments as analytics and more traditional roles butt heads. The problem is the effect on the bottom line. Silos are vampires and suck the life blood away from the overall health of a business or organization.
Companies need to sustain their organizational lifeblood by moving from a conquest-based departmental viewpoint to a collaborative one. The players that play for the team rather than for the individual stars become an irresistible force.
How will marketers work with new technology? The technology’s built, but are we letting the operators come? Are we investing in training people? If we aren’t, what does that say about our future efforts to get talent?
While there has been significant criticism of companies like Apple hoarding cash, Salesforce Chief Executive Marc Benioff said:
We can’t just keep making these small acquisitions … That strategy was just taking honestly too long. We needed to do something of consequence and we needed to do something strategic and we needed to do something now.
Now. Sounds like a call-to-action.
Judging by the media attention Salesforce has generated, not every company has been blind to the reputational effects of putting cash to work.
Companies continue to share or invest cash by finding investments that fulfill their vision of new data-driven and social tools. As tools continue to open up portals in space, companies will look to how they can build their businesses in a way that allows them to go through those portals, find new worlds and make their businesses thrive.
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Related articles
To the letter: How board letters can speak to stakeholders
Deal with the issues before the issues you didn’t deal with become the issue
One of the most contentious issues for stakeholders is executive compensation. Prudential Financial is doing things right according to Laura Rittenhouse and Amanda Gerut. Prudential took on the subject of executive compensation, and changes they made to compensation.
Prudential board lead independent director, James Cullen, sent a letter to shareholders adding to the board’s letter. A simple step forward most companies don’t do.
Cullen talks about how his role fits into the board’s agenda, and how he works as a go-between for board chairman and independent directors.
Truth and its affect on stakeholders
In a world where too many stakeholders see less than best practices used in IPOs, the marketing of hot products and coverage of business generally, truth in investor communications makes investors take notice. Warren Buffett says, speaking on behalf of Berkshire Hathaway:
… as a company with a major communications business, it would be inexcusable for us to apply lesser standards of accuracy, balance and incisiveness when reporting on ourselves than we would expect our news people to apply when reporting on others … The CEO who misleads others in public may eventually mislead himself in private.
Buffett’s philosophy stands out:
- Go beyond what’s required
- Report what’s most beneficial to stakeholders
- Focus on what’s best in the long-term for your organization and reputation
Truth builds trust. Trust between companies and stakeholders is one of the most important aspects of business communications today. It’s important because of how trust has declined since the financial crisis.
Truth and building trust are the right things to do. A simple Google search on “investors” and “executive compensation” turns up too many companies having faced or facing stakeholder ire. Amidst the new investor activism, Rittenhouse lauds Prudential’s focus on compensation and sees it as much more than just lip service.
Letters to the board are an excellent tool for engaging disenchanted investors.
Leading by being
Allstate went further this year. Its board letter pointed out specific pages in its proxy explaining performance stock awards and CEO compensation.
Compensation and governance: an area where many fear to tread. But companies who deal with these issues don’t only look like thought leaders – they are thought leaders.
In 2011, Allstate’s say-on-pay result was about 57 per cent. Tom Wilson, CEO and chairman, along with company management teams, engaged with institutional investors after the 2011 meeting. The board then included a letter to shareholders in the annual report and proxy package.
Allstate got an enormous vote of confidence: 92 per cent support from investors in the next annual say-on-pay vote.
What I think is ideal is going from reading these letters to seeing how governance translates into performance and strategic execution at the company …
Boards overseeing strategy and executive compensation: Greatest value add
Rittenhouse says board letters that engage stakeholders in how the the board is overseeing strategy and executive compensation have the greatest value add. Since investors are often most concerned about these areas, it’s clear they should take prominence, and:
- Reflect a strategy where truth in communications is important
- Uphold and enhance organizational reputation through actively listening to what is most important to stakeholders and acting on those issues
Action without listening looks a lot like obfuscation to stakeholders. Listening and then acting strategically reflects serious thought leadership.
Focusing on short-term gain too often leads to long-term pain. You can talk about leadership ad infinitum, but actually leading resonates with stakeholders. Win someone’s trust and you win someone’s heart.
If this sounds too touchy-feely, consider the touch and feel of being perceived as an organization that doesn’t tell the truth. Consider the effect on your brand, performance and reputation.
As Buffett and Rittenhouse point out, deceiving stakeholders is deceiving yourself. Informing stakeholders speaks to your ability to strategize and perform.
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This work and all work on this blog is licensed under a Creative Commons Attribution-ShareAlike 3.0 Unported License.
Related articles:
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You’ve got to do something about your reputation: Why CEOs need to pay attention to reputation management (johnrondina.wordpress.com)
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Brave new reputation: What CEOs need to know (johnrondina.wordpress.com)
To the letter: How truth speaks to stakeholders
Technological change is blasting us forward and continues to solidify the role reputation and trust play for organizations of all kinds. Even some news organizations, entities multiple stakeholders look to for unbiased information, can succumb to what is less than best practice.
According to Gallup, distrust in the media has hit a new high, with 60 per cent saying they have little or no trust in the mass media to report the news fully, accurately and fairly. Pew found almost “one-third of the respondents (31%) have deserted a news outlet because it no longer provides the news and information they had grown accustomed to”.
In the New York Law Journal, 2009 was referred to as “the Year of Investor Anger”. FAIR Canada published a report in 2011 called A Decade of Financial Scandals highlighting fraud as a problem and making recommendations for prevention, detection, prosecution and compensation. Edelman‘s recent study on trust revealed trust in banking and financial services has dropped 50 per cent even amongst global, informed publics.
Against this backdrop, where investors both small and institutional are looking for a return but also an investment they can believe in, Laura Rittenhouse looks beyond what is reported in most public companies’ financials. She looks for innovation in communications.
Rittenhouse writes about CEO communications. She focuses on strategy, culture and performance with the idea of truth key in her audits.
Truth as competitive advantage
Today, forward-thinking companies are embracing the opportunity to really “talk” to investors and other stakeholders. There’s so much noise surrounding annual general meetings and annual reports that investing in communicating regarding contentious issues pays dividends.
An organization that sees the light on corporate transparency thinks in a more holistic way. Organizations stepping forward to be thought leaders are creating best practice not rushing to engage in best practices because others have already set the agenda for them.
Truth in reporting is so obvious that it bears more focus. Sometimes, it’s the obvious issues that fall out of the cross hairs of what’s important for managements to do.
Richard Edelman notes how logic becomes oxymoron:
[CEOs demand] … less regulation while CEOs suggest that enforcement of the new regulations has restored trust; this is a baffling logic problem.
Yet this is part of the duality of the human being. Although we know what’s right, we don’t always do what’s right.
Anyone who doubts what negative sentiment or negative media attention can do when an organization is held up to pursue less than best practices, and what that can do to reputation, might want to take a look at what legislators are calling “egregious” and “outrageous” regarding Apple’s “web of tax shelters”.
[While other companies have taken advantage of loopholes,] … I’ve never seen anything like this, and we don’t know anybody who’s seen anything like this.
— Carl Levin, chairman of the Senate Permanent Subcommittee on Investigations
Business culture suffers due to lack of transparency. The reputation of business is left to the media which will tend to focus on the worst rather than the best. The media plays a vital role in highlighting tremendous failures in business but it’s up to businesses that are engaging in innovative practices to tell their story.
Business needs to get better at communicating. Business needs to communicate true innovation and best practice. It may have been the best of times with respect to some companies, but the organizations that showed up most often in the wake of the financial crisis are the ones that reflect a “worst of times” operational execution.
In such an environment, companies operating in a forward-thinking manner will be best positioned to gain from stakeholders’ need for a positive story. While it’s important to reveal worst practices, corruption and other failings, there’s a decided human need for the positive, for the feel-good story wrapped in the long-term resilience of truth.
Rittenhouse is a big proponent of a new wave of letters from directors and boards. She feels it’s a “powerful opportunity” to make a statement about governance.
A letter may be traditional but it’s impact can be revolutionary. Truth is the revolution. Companies need to tell the truth not only for the advantages truth will bring from a long-term operational point of view, but because it’s absolutely the right thing to do.
Part Two: Why boards need to deal with the issues
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- Denial in the Corner Office (edelman.com)
-
You’ve got to do something about your reputation: Why CEOs need to pay attention to reputation management (johnrondina.wordpress.com)
-
Brave new reputation: What CEOs need to know (johnrondina.wordpress.com)