{"id":21540,"date":"2011-06-07T09:30:08","date_gmt":"2011-06-07T13:30:08","guid":{"rendered":"http:\/\/countingpips.com\/fx\/?p=21540"},"modified":"2011-06-07T09:30:08","modified_gmt":"2011-06-07T13:30:08","slug":"three-warning-signs-of-a-dangerous-dividend","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2011\/06\/07\/three-warning-signs-of-a-dangerous-dividend\/","title":{"rendered":"Three Warning Signs of a Dangerous Dividend"},"content":{"rendered":"

By Carla Pasterna, DividendOpportunities.com <\/a><\/strong><\/span><\/span><\/p>\n

Three Warning Signs of a Dangerous Dividend<\/strong><\/span><\/p>\n

One fund is paying a tempting 11% yield. \t\t\t\t\tAnother offers 8%. Which one should you reach for?<\/span><\/p>\n

To answer that, you need to ask the right question.<\/p>\n

The question is not, “How high is the yield?” Instead, it’s \t\t\t\t\t“How secure is the dividend?” Dividend safety is far more \t\t\t\t\timportant to total returns than yield size. I touched on \t\t\t\t\tthis idea<\/a><\/span> a few weeks ago.<\/p>\n

<\/span><\/p>\n\n\n\n
<\/ins><\/ins><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

<\/span><\/p>\n

World Wrestling Entertainment (NYSE: WWE<\/a>) chopped its \t\t\t\t\tdividend by two-thirds in late April. The shares fell 9% in \t\t\t\t\ta day.<\/span><\/p>\n

Alpine Total Dynamic Dividend Fund (NYSE: AOD<\/a>) cut its \t\t\t\t\tmonthly payments in half from $0.12 per share to $0.055 back \t\t\t\t\tin June 2010. The shares fell more than 13%.<\/p>\n

The good news is that it is fairly easy to assess how secure \t\t\t\t\tpayouts are — especially for income-focused funds. Here are \t\t\t\t\tthe three warning signs to watch:<\/p>\n

\"\" Return of capital
\n\"\" Undistributed net investment income (UNII)
\n\"\" Payout ratio<\/p>\n

Return of capital<\/strong> — When a fund makes regular \t\t\t\t\tpayments consisting of “return of capital,” it can be a \t\t\t\t\tsignal of a dangerous dividend. Often, these payments are \t\t\t\t\tsimply returns of an investors’ own capital or shareholders’ \t\t\t\t\tequity.<\/p>\n

Funds supplement their distributions with returns of capital \t\t\t\t\twhen investment income or gains aren’t enough to maintain \t\t\t\t\tthe dividend. In effect, the fund dips into its capital pool \t\t\t\t\tto keep up the dividend.<\/p>\n

Undistributed net investment income (UNII)<\/strong> — \t\t\t\t\tClosed-end funds are required to distribute at least 90% of \t\t\t\t\ttheir taxable income each year to avoid paying corporate \t\t\t\t\ttaxes on what’s distributed. They also must pass along at \t\t\t\t\tleast 98% of their income and net capital gains each year to \t\t\t\t\tavoid paying a 4% excise tax on what’s distributed.<\/p>\n

However, some managers elect not to distribute all income \t\t\t\t\tearned during the year and instead pay the 4% excise tax on \t\t\t\t\tthis income. What’s lost to taxes is gained in asset value, \t\t\t\t\tand the UNII can be used to supplement future distributions \t\t\t\t\tas needed.<\/p>\n

So UNII secures the dividend and bodes well for dividend \t\t\t\t\tincreases.<\/p>\n

In contrast, over-distributed net investment income, when a \t\t\t\t\tfund distributes more than it made in a year, may be a sign \t\t\t\t\tof dividend danger. The statement of assets and liabilities \t\t\t\t\ttells you whether the fund has undistributed or \t\t\t\t\tover-distributed income.<\/p>\n

Payout ratio<\/strong> — Closed-end fund distributions \t\t\t\t\ttypically can come from three sources: return of capital, \t\t\t\t\tcapital gains, and investment income. Of these, investment \t\t\t\t\tincome from dividends and interest on portfolio holdings is \t\t\t\t\tgenerally the most predictable as they are issued at regular \t\t\t\t\tintervals.<\/p>\n

The payout ratio provides a handy measure of how much of the \t\t\t\t\tfund’s distribution comes from investment income, net of \t\t\t\t\texpenses. The ratio provides a quick gauge of how secured \t\t\t\t\tthe yield is by the fund’s current portfolio holdings. So if \t\t\t\t\ta find earns $1.00 per share in net investment income and \t\t\t\t\tpays out $0.90, you can quickly see a fund can cover its \t\t\t\t\tpayments without dipping into its capital or depending on \t\t\t\t\tstock gains.
\n
\nGood Investing!<\/span><\/p>\n

<\/span><\/p>\n

\"\"
\nCarla Pasternak’s Dividend Opportunities<\/em><\/span><\/p>\n

<\/strong>DividendOpportunities.com <\/a><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

The question is not, “How high is the yield?” Instead, it’s “How secure is the dividend?” Dividend safety is far more important to total returns than yield size. I touched on this idea a few weeks ago.<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-21540","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/21540","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/comments?post=21540"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/21540\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/media?parent=21540"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/categories?post=21540"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/tags?post=21540"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}