Tag Archives: stocks

What Canadian Blue Chip Stock is Paying a Dividend Only Yield of 17%?

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I hope to fund part of our retirement costs with dividend income. That’s led me to invest in a few dividend paying ultra-low risk stocks over the past few years. When I bought each position, I thought about the dividend yield it was offering and whether it seemed reasonable compared to the interest yields available from fixed income investments. One thing that became obvious was that dividend yields tend to be fairly low at the time of purchase considering the amount of risk you’re taking by investing in the stock market. I do own one blue chip stock, though, that is currently paying me a dividend only yield of 17%.

Percentages Can Be Deceptive

One thing I’d like to warn you is that you can’t live off percentages.

You may have a stock that is paying you a 7% annual dividend. That sounds great. Your bank account is probably only paying you 1.35%. And your one-year GIC is probably only paying 1.65%. At 7% you must be cruising, right?

Well it depends on how much money you have invested at that 7% yield. If you only have $1000 of that stock, your actual take home income is $70 a year before taxes. It’ll pay the high speed internet bill for one month, but it won’t pay the winter’s natural gas bill.

What Is the Real Percentage Yield?

I started this by mentioning I have a stock that’s paying 17%.

It would be more appropriate to say it’s paying $336.53 a year.

The percentage yield is very deceptive.
The initial investment in the stock was $1946.25.
In theory, that could mean the dividend yield for this stock is 17.2912%.

But is that realistic?

Present Day Dollars are Not the Same as Past Dollars or Future Dollars

To calculate a more realistic yield, I think I would have to change the value of the initial investment into “today’s” dollars.

For example, if I spent $1000 on January 1, 2012, that would be comparable to having spent $1012.38 on January 1, 2013. I could have purchased more for the same money a year ago because inflation was less. Or I could have purchased the same amount a year ago for less money because inflation was less. (I used the Bank of Canada Inflation Calculator for this example.)

So what would the cost, $1946.25 be in December 2013 if I had to buy those shares then?

According to the Bank of Canada calculator, it would have cost me $2880.64 to buy the same shares in 2013 that cost me $1946.25 all those years ago.

Out of curiosity, I also poked around the internet and found a couple of US inflation calculators.

According to data from Oregon State University and a calculator at http://www.davemanuel.com/inflation-calculator.php, if I was talking USD, the $1946.25 would be $3338.34 in 2013 dollars.

According to the calculator at http://stats.areppim.com/calc/calc_usdlrxdeflxcpi.php, it would be $2997.53 or using CPI data $3 325.39.

Why is there a difference? Because it depends on what values you use for the inflator/deflator.

The actual value doesn’t worry me too much. What I’m trying to point out is that the dividend yield would be more realistic if I divided the payment of $336.53 by $3 338.34, not $1946.25.

So what is that reduced yield? 10.08%

Why It’s Worth Buying Dividend Paying Stocks That Routinely Increase Their Dividend

The yield of 10.08% on this stock is still pretty good.

If I bought more shares in the exact same company today, I’d only get a 2.22% dividend yield.

At the time the first dividend was paid a few years after the shares were purchased, the yield was 0.15%.

You can see that the dividend has increased significantly over the years. In fact, unless I’m screwing up my math again, it has increased faster than the rate of inflation.

If a stock increases its dividend at a rate greater than inflation, and if I buy that stock when the dividend yield seems reasonable, then I consider the purchase to be similar to buying an annuity. Provided I keep that stock (and the company continues to prosper) I can receive a steady income stream that keeps up with or exceeds inflation.

Obviously buying stocks is much more risky than buying an annuity:

  • any company can fail
  • a dividend can be reduced or eliminated without warning
  • a company can decide to stop increasing a dividend without warning
  • if you sell shares of a company you can lose capital

However, unlike an annuity, my money is not actually locked in. If I pay attention to the business fundamentals for the company, and if I’m lucky, I can sell a stock that begins to under perform and buy something else. I may lose capital by doing this!

On the upside, though, I may also find my stock appreciates in value. If so, I can sell part of my stock and use the capital gains to invest elsewhere or to spend. (Of course if I sell the stock I will stop receiving the dividend: it’s that Goose that lays the Golden Eggs thing all over again.)

Is Buying Dividend Paying Stocks a Good Retirement Plan?

I honestly don’t know. It’s part of my strategy but certainly not all of it. I have

  • a big chunk of money in fixed income (and because I am extremely risk averse it is a very big chunk);
  • another big chunk of money in “buy the entire stock market” ultra-low fee ETFs
  • a small amount of money in individual dividend-paying ultra-low-risk stocks

At this point, I would say only my future “vacation for a week somewhere further south than Timmins” retirement money is invested in individual stocks. I can forgo the annual vacation in retirement if I have to. I can’t forgo eating.

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Do you invest in individual companies that pay a steadily increasing dividend to investors? Do you ever check what your “real” yield is? Do the dividends help fund your retirement or do you hope they will some day? Please share your views with a comment.

Why Do Companies Issue Stock Splits Especially When a Stock’s Price Rises to Over $100?

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There’s been a steady stream of 2-for-1 stock splits in 2013 and upcoming in 2014. For instance, Canadian Utilities and CN split in 2013 and both the National and TD banks have announced a split coming up in early 2014. In each of these cases the stock’s price had risen either close to or over $100. It made me wonder why do companies split stocks and is there something magic about the $100 price mark that triggers a split?

Trading Shares in the Days Before Electronic Stock Exchanges

As I explained in Can I Buy or Sell a Small Number of Shares of a Stock, Say 18?  you can buy or sell any number of shares at most online discount brokerages without paying any extra fees or penalties. You do have to pay the full trading commission even if you only buy or sell 1 share, though, which deters most people from flipping  very small numbers of shares.

In the olden days, however, you almost always had to buy or sell shares in groups of 100. The package of 100 shares was called a “board lot.” It made person-to-person trading simpler. Selling a non-board-lot, called on “odd lot,” often cost more if it was even permitted. Not long ago, the trading commission on any lot used to be hundreds of dollars; most investors with enough money to justify the trading commissions also had enough money to afford to buy shares in multiples of 100.

(Stocks valued under $1 used to be packaged in lots of 1000 shares or more.)

Keeping the Value of a Board Lot Under $10 000

You can calculate that if a share of a company cost $100 and you had to buy a board lot of 100 shares, you would need to have $10 000 plus the trading fees handy.

This may be where the magic price of “$100 per share” came into the decision-making about splitting a stock. As the price rises above $100 per share, the cost of a board lot increases above $10 000. That may start to price the lot out of reach for some smaller investors.

If the company offers a 2-for-1 share split, each person owning 1 share is granted 1 additional share. For a routine split, the price of the shares and the dividend per share is then also split in half.

A 2-for-1 split would reduce the price of a board lot for a stock with an initial price of $100 per share or $10 000 per lot to $50 per share or $5 000 per lot.

That may increase the attractiveness of the stock to small investors, which in turn may encourage a further increase in the price of the shares.

Why Does It Matter What the Price is Per Share If Investors Do Not Have to Purchase Board Lots?

Now that small investors can purchase shares without buying them in board lots, it’s not clear to me why stock splits are still so common.

They obviously are not mandatory. Here are some examples of companies that haven’t bothered to split their stock to keep share prices low. Today, a share is trading at

  • $ 535.39 for Apple
  • $ 1 108.53 for Google
  • $ 176 300 000 for Berkshire Hathaway A

What Do Companies Say About Splits in Their News Releases?

So what reasons did TD offer in their recent news release about their 2014 2-for-1 share split? From what I can read, they didn’t offer any justification!

CN didn’t offer any justification either.

Apparently it’s supposed to be “intuitively obvious” why the split is needed, to quote my first-year math professor who often used the phrase when describing saddle functions.

The National Bank did offer this explanation: “The Bank is undertaking the share dividend to ensure that its common shares remain accessible to individual shareholders and to improve market liquidity for the common shares.”

Canadian Utilities, which split its shares in 2013, said: “Canadian Utilities is undertaking the share splits to ensure that the Class A shares and Class B shares remain accessible to individual share owners, to increase and broaden Canadian Utilities’ share owner base and to improve market liquidity for the shares.”

Is a Stock Split Just a Mirage to Boost Prices?

When a stock splits by offering more shares at no cost to a person holding existing shares, the value of the corporation does not change. The total dividend does not change either. There is no tangible benefit to the investor because of the split.

So why does the price of a stock often increase after a split?

Logically, it should either go up or down just as it would have prior to the split based on the usual factors to determine the worth of a company.

Illogically, sometimes the price goes up not because of any real change in the value of the company but simply because of a change in perception of the same facts.

Sometimes new investors purchase shares in the company after a split because they seem “more affordable” The fact they could have purchased, say, 50 shares at the pre-split price or 100 shares at the post-split price and obtained the same ownership in the company’s future doesn’t seem to matter.

Also, sometimes investors see the split as a signal that the company expects further growth quickly in its share price. Again, that can result in new investment even though the split itself did nothing to change the company’s outlook.

Yahoo Finance does suggest that a split may make it easier to sell shares by reducing the price a buyer needs to offer. I guess it’s possible that it’s easier to find two buyers with $5 000 each than 1 buyer with $10 000 but I wouldn’t think that was a huge factor for most companies that split stocks.

I have yet to find any evidence to suggest there is a genuine improvement in a company’s performance because of a split. Have you?

Should I Buy TD Before Its 2-for-1 Stock Split?

The answer to this is simple: Would you buy it if it wasn’t splitting?

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Do you think a share split in and of itself increases the value of a company? Or does it just increase the price of its shares? Please share your views with a comment.