Part four of my series is about adding companies that increase the amount of their cash flow they return to owners over time.
music selection: “Du Hast” — Rammstein
Companies typically have three methods to return value to shareholders. These are: repaying debt, repurchasing stock, and dividends. Dividends and dividend growth get a lot of press, especially on finance blogs and the other two (equally important!) avenues go largely ignored. Not by the Lizard King though! Stocks with the features listed below make up the bulk of what I am trying to add and even transition to now that my early retirement cash needs are met. Ideally, I want equal amounts of shareholder yield stocks, insurance stocks, and free cash to secure written puts. I will get there in time.
Dividend growth investing gets the most ink and I think this is because the information is easier to find. A frequently updated spreadsheet of all US companies that have raised their dividends 5, 10, and 25 years is maintained online here. This Excel spreadsheet comes with lots of additional analytics on the growth rate, payout ratios, and other useful information. Isolating the dividend growth rate is where a lot of investors stop their search. It should be noted that dividend yield as reported by most outlets is the “regular dividend” rate. Many companies offer a special dividend once or more often a year that is ignored in this calculation. A company like The Buckle (BKE) shows 0.92 cents of annual dividends on Yahoo! Finance (2.00%). But the real yield is actually $3.62 or 8.07% for the trailing twelve months thanks to a large special dividend. Make sure to look under the rocks for bonus yield.
Debt should be a key component of every stock analysis. While leverage boosts return on equity, it increases risk and comes with an interest rate cost. If a company is paying down debt, you can think of that as cash as having been returned to the owners. It is your balance sheet that improves after all. It also saves interest expense that can be redirected to other shareholder friendly options. A company that is increasing debt should be thought of as reducing your yield. Apple is a good example. They have recently started paying a distribution. But they have been borrowing cash to pay the dividend (so as not to have to pay taxes on foreign cash repatriation.) The ‘real’ shareholder yield is thus much lower than most people realize.
The last component of shareholder yield is share repurchases. This has grown increasingly popular. Companies are often hesitant to limit their future options by declaring a regular dividend that will be an expectation in future quarters. As alternatives, special dividends, and share repurchases are used. All of the above are as good as gold to a raptor. You will realize capital gains from share repurchases rather than cash distributions. Shares can be sold to convert to cash.
I’ll also note that savvy raptors can juice the yield on a stock that is near its full fair market valuation. Just write a near but out of the money covered call. I like to do covered calls approximately 10% out of the money and 6 to 8 weeks on expiry date. In most cases, you can count on an addition 2% bonus yield on an annualized basis. Most issues in the shareholder yield/growth arena are currently yielding about 2% so you actually double your return with this method.
Devour your prey raptors!