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What is Dividend Yield? | Investing 101 - YouTube
Channel: Let's Talk Money! with Joseph Hogue, CFA
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Iâm sharing an easy explanation to the question,
âWhat is Dividend Yield?â using Apple
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dividends and some of the biggest risks to
dividend stock investing.
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Iâll not only show you how to calculate
the dividend yield quickly but reveal five
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dividend stock strategies for higher returns
without the risk.
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Weâre talking dividend yield today on Letâs
Talk Money!
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Beat debt.
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Make money.
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Make your money work for you.
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Creating the financial future you deserve.
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Let's Talk Money.
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Joseph Hogue with the Letâs Talk Money channel
here on YouTube.
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I want to send a special shout out to everyone
in the community, thank you for taking a little
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of your time to be here today.
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If youâre not part of the community yet,
just click that little red subscribe button.
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Itâs free and youâll never miss an episode.
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Probably no other measure in dividend investing
is as popular or dangerous as the dividend
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yield.
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It makes sense, right?
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Thatâs your cash return and investors are
all about getting as high a return as possible.
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In this video though, Iâll explain the dividend
yield, how to calculate it and some risks
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around it.
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Weâll talk about what is a good dividend
yield and then Iâll reveal five dividend
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investing strategies you can use for solid
returns.
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This is hugely important not just for dividend
investors but for all stock investors.
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Iâve gotten a lot of questions about our
2019 dividend stock portfolio, why I only
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filtered for stocks paying a 3% yield or higher
instead of going for the really high yielding
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stocks.
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You only need to look at that 24% total return
in just the first four months to see that
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itâs all about balance to getting the highest
total return.
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Five of our dividend stocks are up over 35%
so far with Hanesbrands surging 67%.
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A stocks dividend yield is the cash return
you get on the investment on a yearly basis.
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Now thatâs important because most stocks
pay their dividend four times a year but only
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pay a fourth of that annual yield.
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So you might see a 3% dividend yield and receive
a dividend every three months but youâre
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only collecting that portion of the annual
yield.
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Letâs look at an example with the Apple
dividend because it gets much easier when
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you see it applied.
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We see here that besides having a VERY good
day after reporting first quarter earnings,
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Apple is trading at $214 per share.
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This forward dividend and yield reported here
is for the entire yearâs payments, so investors
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should expect to receive $2.92 in dividends
for every share of Apple they own.
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What you will actually receive is $0.73 every
three months but remember we use the annual
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number to calculate the dividend yield.
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So if we take that $2.92 in dividends received
over a year and divide by the current $214.16
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share price, we get a dividend yield of 1.36%.
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It says 1.54% here as the yield and thatâs
an important point you want to remember.
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This 1.54% yield is based on the stock price
yesterday so it hasnât updated on todayâs
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big move.
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Understand that as a stockâs price increases,
if the company doesnât also increase the
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dividend payment then the dividend yield will
go down.
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Conversely if a stockâs price falls and
the dividend payment stays the same, the dividend
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yield will go up.
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If Apple shares were to fall to $175 each
and the dividend stayed at $2.92 a year, then
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investors would be getting a 1.66% yield.
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This uncovers one of the biggest risks in
looking at just the dividend yield.
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If you see a high dividend yield, you also
need to look at the stock price over the last
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year.
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If the shares have been falling and the dividend
hasnât been cut, thatâs going to increase
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the yield but it could be a dangerous assumption.
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First, if the company is in too much trouble,
it might cut that dividend to conserve cash.
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Just as importantly though, what good is it
to collect that hefty dividend if you lose
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double that on the stock price?
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So dividend yield is important but itâs
not the only thing you should be looking at.
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Thatâs going to be big in the five dividend
investing strategies weâll talk about now.
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First though, if youâre likinâ the video
and think the information is helpful, do me
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a favor and tap that thumbs up button below
and let me know in the comments.
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Now a good dividend yield is what you can
get while still getting some upside return
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on the stock price.
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We talked about this idea in our dividend
payout ratio video.
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A company can return all its cash to investors
through a dividend but thereâll be no money
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left for growth and it may even lose competitive
share, causing the stock to fall.
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That means, when Iâm looking at dividend
yield and the payout ratio, Iâm looking
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for companies with a commitment to return
cash but also to grow the company.
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That generally means a good dividend yield
between 3% to 6% for regular stock companies.
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Since the dividend yield on the market, the
S&P 500 is just under 2%, companies in this
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three to six percent range are well above
the average and demonstrate that yield commitment.
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Now I know that a lot of investors want to
go for the highest dividend they can get,
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investing in stocks with double-digit yields
and if the stock price doesnât fall then
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thatâs not a bad return.
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A lot of times though, weakness on the share
price and volatility just isnât worth that
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marginally higher dividend.
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Letâs look at those five dividend investing
strategies though because a few of them will
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really help you get those higher yields with
some solid price returns as well.
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One of the most popular dividend strategies
is investing in monthly payers.
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Weâve seen that most dividend stocks pay
out just four times a year.
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That can make it difficult to plan for paying
expenses if youâre living off your dividends
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or just as a passive income stream.
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Thatâs where monthly dividend stocks come
in, companies with a policy and a history
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of returning cash to investors every single
month.
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Even better, these stocks have a median yield
over 8% annually, thatâs over four-times
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the dividend yield of the broader market.
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These are some great opportunities to create
that monthly cash flow thatâs either going
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to grow your portfolio or give you that extra
cash each month to pay the bills.
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Now I am going to warn you, these monthly
payers tend to be in just a few business types.
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We see here that about 40% of monthly payers
are real estate investment trusts, another
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38% are business development companies and
then some energy companies, usually master
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limited partnerships.
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We also see the average dividend yield in
each group so 7.4% on MLPs, 7.5% on REITs
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in the space and a whopping 10.1% average
yield on BDCs.
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Thereâs a reason for this weâll talk about
and why these cannot be your only investment
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in dividend stocks.
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Again, do not think you can put together a
portfolio of just these monthly dividend stocks
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because itâs going to put your money at
risk.
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We see in that graphic, putting all your money
here is going to grossly expose you to just
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a few business structures.
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These companies set up as BDCs, REITs or MLPs
get special tax breaks but have to pay out
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almost all their earnings as dividends.
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That means they tend to have volatile share
prices, they have to raise money regularly
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through debt or equity and they are highly
exposed to rising interest rates.
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These monthly payers also tend to be much
smaller companies than other stocks.
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For example, of the 28 legit monthly payers
I follow, the average size is just $723 million
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with the largest only a $20 billion company.
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That might seem like a lot but itâs miniscule
next to a trillion dollar company like Amazon
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or Apple and none of the S&P 500 companies
pay monthly dividends.
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The fact that they are smaller companies with
less financial flexibility means you need
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to stay up on all the usual warning signs
for dividend stocks.
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These include sales growth, debt leverage
and some other signs you need to watch.
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You also need to understand the management
structure in those business development companies,
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the BDCs.
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Itâs either going to be external or internal
management which is going to make a big difference
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on their compensation.
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External management is usually compensated
by growth in the companyâs invested assets,
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so they want to make as many investments as
possible even if they arenât necessarily
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great investments.
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Internal management compensation is tied more
directly with investor returns.
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Finding these monthly dividend stocks is pretty
easy with any stock screener or a Google search
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on monthly payers.
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What I want you to consider when youâre
using this strategy are just a couple of points.
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First is to make sure you spread your dividend
portfolio across different sectors and business
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types.
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That probably means only having a chunk of
your dividend investments in these monthly
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payers since theyâre mostly those REITs,
MLPs and Business Development Corporations.
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Second is to pay attention to the share price
over the last few years as well.
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Donât get caught up in that high dividend
yield because you donât want it at the expense
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of a falling stock price.
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Weâve got a complete video on the channel
about investing in monthly dividend stocks
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so Iâll leave a link to that in the video
description below.
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One dividend strategy we havenât talked
about on the channel but actually has a lot
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of research to support it is the Dividend
Aristocrats.
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Dividend Aristocrats is the name given to
companies in the S&P 500 index, so weâre
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talking companies of about $5 billion or larger,
that have increased their dividend payment
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for at least 25 consecutive years.
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Nearly three decades of increasing dividends
is a huge commitment, especially considering
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that includes the 2008 recession which was
the worst in 80 years.
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Stocks that increase their dividends have
been shown to outperform the rest of the market
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and these Aristocrats are a great way to play
on that.
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That list peaked at 64 stocks in 2001 but
has since fallen to just 57 companies that
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meet the filter.
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Over the decade to March 2019, the Aristocrats
have returned an annual 17.6% versus a 15.9%
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return on the broader S&P 500 market index.
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Not only has it outperformed the market but
the Aristocrats index has also done it with
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less volatility, so fewer violent ups-and-downs
in the prices.
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Now instead of trying to keep track of all
57 companies in the Dividend Aristocrats list,
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there are funds like the Proshares ETF, ticker
NOBL, that will do it for you.
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The fund holds all stocks in the Aristocrats
index and has a 2.3% dividend yield.
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What I want you to notice though if youâre
going to invest in the fund or the Aristocrats
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stocks, is this fund sectors and their weighting.
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Most of the fund is in just a few sectors
like consumer staples, industrials and financials.
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Thatâs obviously a function of how safe
the sectors are for cash flow and how the
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companies have been able to keep increasing
their dividends year-over-year but you might
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want to pair this fund with another that has
maybe a growth stock perspective.
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The reason here is that way you get more from
sectors like tech, consumer discretionary
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and others to balance out the heavy weighting
in just these three sectors in the Aristocrats
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fund.
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Another strategy, actually my favorite dividend
yield strategy, is investing in real estate
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investment trusts, REITs, and master limited
partnerships, MLPs.
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Like we saw in that previous strategy, these
are special types of companies that get tax
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breaks for returning most of their cash flow
to investors.
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Not all of them are monthly payers though
and I think some of the best picks are actually
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those normal quarterly-paying stocks.
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So REITs or real estate investment trusts,
are companies that own and manage property,
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usually commercial real estate property.
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The company pays expenses then passes through
at least 90% of the earnings to investors
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in the form of dividends.
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Investing in REITs, itâs important to spread
your investment across companies with different
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property types like office, warehouse, hotel,
data centers, retail, industrial and self-storage.
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MLPs or master limited partnerships own mostly
pipelines that transport oil and natural gas
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and then the storage facilities.
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They collect a fee from other energy companies
for using the assets and pass most of their
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earnings on to investors.
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Since much of their fee is based on the amount
that goes through those pipelines or is stored
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in tanks, they arenât quite as depending
on energy prices so it can be a great way
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to lower the risk of weak oil or gas pricing
in your investments.
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With REITs and MLPs, I want to cover two very
important points to help you when youâre
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looking for these stocks.
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First is that taxes on the investments are
handled very differently.
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Taxes on dividends from REITs are like any
other dividend stock.
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If you hold the shares for more than 60 days
around that dividend payment, you pay a lower
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qualified dividend tax rate and you pay those
taxes each year on the dividends you collect.
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One of the best pieces of advice I can offer
with dividend investing is to hold these high-yield
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stocks in a retirement account, either an
IRA or a Roth IRA.
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Thatâs going to save you from having to
pay those taxes each year on the dividends
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and will seriously boost your returns.
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MLPs, master limited partnerships, are taxed
entirely differently.
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For each MLP company you own, youâll get
a special tax form each year called a K-1
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form.
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This is going to break out the dividend between
a return of capital and a normal dividend
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portion.
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Now that return of capital portion of the
dividend, and this usually ends up being the
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majority of the dividend, isnât taxed each
year.
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It actually goes to lowering the taxable price
you paid for the shares so you donât get
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taxed on it until you sell your shares.
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Itâs a huge tax break, shielding you from
that annual tax hit on the full dividend but
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it also means you donât want to hold these
in a retirement account.
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Hold these MLP investments in a regular taxable
investing account so you take advantage of
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that tax-deferred benefit.
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The second point I want to cover for REITs
and MLPs, and this is the biggest mistake
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I see investors make on the two investments,
is that you canât use a lot of traditional
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value measures.
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These companies own assets like real estate
and pipelines that mean a huge amount of depreciation
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on the income statement.
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They take that depreciation off their earnings
to lower taxes but it also means that earnings
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are a terrible view of profitability for the
business.
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So if you ever hear anyone talking about the
price-to-earnings ratio of an MLP or a REIT,
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they donât know what theyâre talking about.
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You canât use the P/E ratio with these stocks.
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There is a special way to value each of these
types of stocks and Iâll show you how to
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do that for each.
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What weâre going to use for MLP stocks is
use whatâs called price-to-distributable
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cash flow or price-to-DCF.
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Finding this value for distributable cash
flow, the amount of money the company has
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available to return to investors, is important
also because it gives us an idea of sustainability.
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A company canât pay out more than is available
forever so itâs a good metric to make sure
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that dividend isnât going to be cut any
time soon.
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Iâll show you how to calculate DCF yourself
but all MLPs will calculate it on their reporting.
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I do it myself only because I like to double-check
the numbers coming out of the company and
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make sure Iâm comparing stocks with the
same calculation.
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Hereâs the table, and again donât get
freaked out because this is always provided
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to you in reporting.
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To find how much money the company has available
to distribute, you take the cash flow from
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operations, this is all going to be found
on the Statement of Cash Flows, and you remove
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any spending on capital and income from non-controlling
interests.
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That gives you sustainable DCF which is what
the company can return to investors and still
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keep operations running smoothly.
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While sustainable DCF is a better measure,
most people use the DCF as reported because
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itâs sometimes the only number reported.
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To get to DCF, you also add back that income
from non-controlling interests as well as
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working capital reported.
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The big one here is adding back this proceeds
from asset sales.
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This is technically proceeds the company can
return to investors, a company canât forever
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be selling its assets and still keep business
running so thatâs why we use that sustainable
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DCF if itâs available.
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With this number, you can find that valuation
with the price-to-DCF or you can find how
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much the company is returning to investors
for whatâs called the distribution coverage
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ratio.
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This is how much DCF the company earns versus
how much it pays out.
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Just like with MLPs, you canât rely on reported
earnings for a REIT because of that high amount
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of depreciation they get from real estate.
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Instead, we use a measure called Funds from
Operations or FFO.
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FFO is very similar to that DCF we saw with
MLPs.
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You take the reported net income of the REIT
and add back depreciation but minus out any
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gains they made on property sales.
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Those property sales are a source of income
but not something the REIT can do forever
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and expect to stay in business.
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Remember, the idea is to find how much cash
the company has available to distribute without
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cutting into money it needs to run the business.
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Again, like the DCF calculation for MLPs,
you donât necessarily have to do this yourself
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because itâs always reported by the company.
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Itâs just a good idea to understand the
concept and be able to double-check the companyâs
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reporting.
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You use FFO just like our other metric so
you can take the price of the REIT over FFO
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to compare the valuation to other REITs.
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You can also get a coverage ratio of FFO over
the dividend to see how safe the yield is
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for the stock.
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Weâve also got a video on the channel that
goes into more detail on investing in these
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REITs and MLPs so Iâll leave a link in the
video description to that as well.
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Weâre about half way through out 2019 Dividend
Stock Challenge portfolio and the stocks are
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blowing up.
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The portfolio is up over 24% so far and beating
the market by nearly ten percent.
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Iâll leave a card here in the corner and
a link in the description as well to see how
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we picked dividend stocks for the portfolio
and how you can join the challenge.
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Weâre here Mondays, Wednesdays and Fridays
with the best videos on beating debt, making
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more money and making your money work for
you.
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If youâve got a question about money, just
subscribe to the channel and ask it in the
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comments and weâll answer it in a video.
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