By: Bruce Miller, CFP®
My previous articles provided some basic information about dividend histories, what we can glean from them and their limitations as selection factors fro selecting retirement income equities.
Additionally, I offered some resources to find information and data about dividend-paying equities and their historical performance. As promised in that preceding article, I will use several specific examples in this article to explain how to evaluate dividends.
Realty Income REIT
The first example is Realty Income (NYSE:O) real estate investment trust (REIT):
This is a partial dividend history for Realty Income REIT and it clearly shows the growth of the company’s dividend. The chart shows that during the 2008 to 2012 period, the dividend growth rate slowed considerably. Should I disregard this stock because of the lower growth rate during these years? This growth rate drop would have been a concern only if I considered buying this stock as a retirement income security in 2012. Therefore, I would evaluate the other selection factors to help me determine the probability that this equity will continue paying rising dividends. A close look at O’s historic dividend data reveals that the company had a policy of strong annual dividend growth from 2004 through 2008, the beginning of the economic recession. Dividends then went “flat” until 2012 when they jumped up sharply and then returned to strong annual growth through 2017. Investors easily can ascertain this information by looking at the dividend data tables from places like www.yahoofinance.com, or by simply reading the dividend chart.
I find it easier to notice trends on a chart. Therefore, I create a simple dividend chart for every retirement income security that I consider for my portfolio. Many websites offer dividend charts and you can pick your favorite. I usually download the history of dividend distributions from the Yahoo!Finance website. After getting to the page for the security that interests you, select the “Historical Prices” tab and make sure to change the “Show:” filter from “Historical Prices” to “Dividends Only.” Once you do that, select your date range and click “Apply” to see a list of all past dividends for your selected date range. Use the “Download Data” link to download all the data into an Excel spreadsheet and create your own chart.
It is not necessary to create a chart for every single equity. Do a quick review of existing charts on any website that provides such information and, once you identify equities that interest you, download the dividend history from Yahoo!Finance as described above to create your own chart for a more detailed evaluation.
Equity Commonwealth REIT
Below is the example of the dividend history for Equity Commonwealth (NYSE:EQC) – formerly Commonwealth REIT (NYSE:CWH). It is immediately apparent that this equity’s dividend history does not look quite as good as Realty Income:
In fact, this is an example of a dividend disaster! To qualify as a REIT, at least 90% of taxable income must be distributed to shareholders each year. Having paid no common dividend since 2014 suggests EQC has had no taxable income since 2014. This graph quickly tells me that I can stop any further consideration of this potential retirement income security. Successive dividend cuts eliminate this REIT immediately from further consideration by me.
When charting out a dividend history, theretirement income investors needs to be vigilant and research the dividend history carefully to avoid misinterpreting what appears like a dividend cut but is not a cut at all. For example, consider the following dividend chart:
The chart above shows what appears to be a massive dividend cut. However, in this case, Altria (NYSE:MO) – a company with long-time reliable dividends – spun off its non-U.S. operations as Phillip Morris International (NYSE: PM) in 2006 and continued its U.S. operations as Altria and kept its old MO ticker symbol. The apparent dividend cut is nothing more than the portion of total dividend distribution that Phillip Morris International continued to pay under the new name.
Let us consider the following dividend chart for Welltower Inc. (NYSE:WELL):
This chart of WELL (formerly HCN) suggests that there was a dividend cut in 2006. However, the company paid out part of the 2006 dividend in 2007 due to a merger, which gave the appearance of a dividend cut. The hint that MO and HCN did not have a dividend cut is that the dividends paid after the apparent dividend cut continue to grow. Generally, any graph that shows a drop in the dividend followed by successive quarters of growing dividends suggests this is a quirk or an anomaly that needs a bit more investigation. When a company has a dividend cut due to its poor financial performance, you will rarely see an immediate continuation of a growing dividend.
Here is an example of a dividend cut from Excelon Corp. (NYSE:EXC):
Exelon is a regulated utility, whose dividend history chart tells us a number of things. EXC cut its dividend in 2003 beginning with a split quarterly dividend in early 2004, followed by a flat (non-growing) dividend 2004-2007. This is followed by a series of dividend hikes and then another flat dividend mid 2008 to mid 2011, followed by another split quarterly dividend and dividend cut that remained flat until 2016. This kind of dividend history suggests management is not committed to the dividend and not very adept at managing the company for steady cash flows. This is a stock the retirement income investor will avoid.
One last potential quirk in a dividend history has to do with stock splits. Some websites that provide dividend histories will take stock splits into account and adjust historical dividend distributions. Yahoo Finance is one of the websites that does this, which makes downloading and charting their dividend histories of any stock much easier.
In a two-for-one or 2:1 stock split, the actual dividend per share amount will be cut in half since the split will double the number of shares while at the same time cutting the price per share in half. There is no net change in the total value of the shares held or the amount of dividend paid. The only difference is that the dividend amount per share is half the previous amount but distributed to twice as many shares.
These are just a few examples of dividend histories that investors must understand before taking a position in an equity for retirement income. Initially, it will take a little time to figure out how to read these charts. However, with a little practice and experience, most investors will be able to create their own charts with minimal effort and quickly identify potential pitfalls from a dividend history chart. Other possible sources of dividend histories include the company’s website, dividendinvestor.com, dividend.com, nasdaq.com, yahoofinance.com and dividata.com, to name a few.
In my next article, I will move to the next equity selection factor – the dividend growth rate. Like the dividend yield, the dividend growth rate has a formula that makes it a more objective metric and will be easier to use than the more subjective dividend history.
Bruce Miller is a certified financial planner (CFP) who also is the author of Retirement Investing for INCOME ONLY: How to invest for reliable income in Retirement ONLY from Dividends and IRA Quick Reference Guide.