UK companies normally distribute dividends to shareholders twice a year through a final and interim payment. Some opt to pay out four times a year but more frequent payers are harder to find and, generally, are a bit quirkier.
For investors that like a drip-drip of income hitting their investment accounts, there are some monthly payers out there. These companies are listed as pooled vehicles such as investment trusts or ETFs.
The trusts hold a portfolio of investments from which they collect income throughout the year, then redistribute as dividends to their shareholders monthly.
Most of the trusts on offer invest in fixed income securities (bonds), with coupons (repayments) that are more reliable than stock dividends. But bonds don’t come with an opportunity for growth.
There are a couple of real estate investment trusts (REITs), such as the Ediston Property Investment Company, that make the monthly payout list.
A REIT is another type of collective investment vehicle that invests in a portfolio of properties from commercial offices to shopping malls.
They receive a favourable tax status from the government but in return, they are required to distribute 90% of the income they receive as a dividend to their shareholders.
REITs also benefit from having fairly predictable revenue collections (monthly rent) and fixed and predictable expenses like utility bills and general maintenance costs.
Think of shopping centres. Many of these properties are owned by REITs. They collect rent from their tenants (shops) and their ongoing expenses are usually upkeep of the centre, utility bills and some general admin costs.
Of course, this says nothing of the vast amount of money required to build the centres in the first place, as well as the periodic facelifts which tend to ensue. Westfield Stratford would have cost billions to build, meaning a lot of rent is needed to make a return on such a large outlay.
Ediston’s lineup of malls is a little less glamorous than Westfield’s, but it follows the same model.
Four payouts a year is common practice in the US, but it is growing in popularity in the UK.
Let's be clear, paying more frequently doesn’t mean paying more. Dividend yields are quoted using annual payouts divided by the price.
For example, if a £100 stock paid £10 a year in dividends it would have a dividend yield of 10%. It could pay this as two lots of £5 or four lots of £2.5. In either case, you’re still only receiving a total of £10.
For a more diversified list of options, it's worth looking across the pond.
The US list of dividend-paying stocks covers a wider range of sectors and industries than the UK. This means it's possible to build a more diversified portfolio of regular income payers.
Source: dividendsranking.com, as at 31/12/2021.
For companies that pay regular periodic dividends, usually the amount they pay is less than the profit they generate. Payout ratios are the proportion of profit a company pays as dividends. These will vary, but most businesses are careful to keep some profit back to give them other options.
If it's been a good year, and after all expenses and large outlays are taken care of, then the cash coffers could still be bursting at the seams. Management has to decide what to do with this extra bounty.
There are several options on the table. They can increase their regular dividend, repurchase their own shares, pay down debt, acquire another company, or let the cash pile up on the balance sheet.
If there is no need to pay down debt, there are no attractive acquisitions to go after and the regular dividend has been raised, three options remain.
One is to let the cash pile up on the balance sheet. That might be okay if there is some need for it soon, but generally, it is not considered an efficient use of resources.
Another is to return the cash to shareholders through share buybacks. In the US share repurchases are common and are increasingly popular here in the UK too. A company can buy its own shares in the market, retire them, and the remaining shareholders (those who didn’t sell any) end up with more of the profits.
An advantage of buybacks is that companies can have a fairly regular programme that they communicate with shareholders. In the US it is common practice for a company to say it has a plan to repurchase around 5% of its shares a year, for example.
This provides good visibility to investors, and the actual size of a programme authorised by a company’s board of directors is publicly available information.
But it can also back management into a corner. And they might feel they have to repurchase shares regardless of their stock price.
There has been a lot written about buybacks and whether they create value or are merely a tool for helping grow earnings per share (EPS). Fewer shares mean higher EPS, and this is an important measure of stock analysis for many investors.
Buying back shares when the stock price is expensive might not be a good idea. Share buybacks are about firms investing in themselves, or their future profits. If they overpay for those future profits, this is not a good outcome for shareholders.
The final option is to issue a special dividend, which is a one-time cash distribution to all shareholders.
They are unpredictable by nature, otherwise they wouldn't be called special. But some companies have a habit of paying them.
Costco in the US springs to mind as a company that performed exceptionally well over the last few years and took the opportunity to shell out its outsized profits to shareholders via special dividends.
It’s hard to spot in advance any special payers, but it's worth looking for companies like Costco that have paid a few in recent years, as they might just be prepared to deliver more dividend presents to shareholders in the future.
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