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.

Follow @JohnRondina

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.

NB: Royal Bank stock used for illustrative purposes.

Image: Flickr, Daily Dividend.

Related:

• Paid for faith and paid to wait: Have you thought about this regarding your dividend-paying investments? <<JohnBlog  – johnrondina.wordpress.com
  

• 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

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.

Follow @JohnRondina

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:

• 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