Lumpy Perpetual Dividend Raisers?
This lumpiness in dividends received by ADR holders makes it difficult to find foreign Perpetual Dividend Raisers.
Dividend programs usually are carefully managed. When earnings and cash flow are somewhat predictable, executives will have a strategy for how they will distribute dividends and whether there will be a growth plan. If there is enough excess cash to grow the dividend each year, usually there will be a target growth rate.
Even if a foreign management team has that kind of dividend strategy in place, what ADR holders will receive is out of their control due to the movement of currency prices.
A company could raise its dividend 5% in a year, but if the currency depreciates against the dollar, ADR holders could see a lower payout, even with the rise in the dividend.
Therefore, it is often very difficult to find foreign stocks that qualify as Perpetual Dividend Raisers. Not only does the company have to cooperate but so does the currency market. And the chances of the dollar steadily decreasing over another currency year after year are small.
This is not a political or economic argument. It’s not that I’m especially bullish on the dollar, it’s just that markets, particularly currency markets, seldom move in one direction. Over many years, there might be a trend. The dollar may depreciate over a particular currency over five or ten years. But it’s highly unlikely the currency’s change will be a straight line.
And that fluctuation could impact a company’s ability to be called a Perpetual Dividend Raiser. If the dollar does in fact depreciate and the company is raising dividends, it could turn out to be a nice investment over the years. However, it will be far less predictable than other types of stocks that we’ve been talking about in this book.
If you want to be assured that you’re getting a greater income stream year after year, a foreign dividend payer might not get the job done.
Another issue when it comes to foreign dividend payers is the frequency of the dividend payments. Investors in American companies are used to receiving a quarterly dividend. Foreign companies often pay only once or twice a year.
For investors who rely on dividend income, that means just one or two big checks coming in rather than four smaller ones.
It’s not a big deal for investors who don’t need the income, but for those who do, the timing can be a problem. Even for investors who are reinvesting the dividend, the once-a-year payment can impact total return negatively.
When you reinvest a dividend that you receive four times a year, you’re spacing your investment out over four periods at four different prices. It’s very similar to dollar cost averaging, where money is invested over periods of time.
If you’re receiving only one payment a year, all of that money is going back into the stock at once. If the stock runs up in anticipation of the dividend, you end up reinvesting the entire year’s dividend at a high price.
A stock’s move before its ex-dividend date is not unusual due to something called dividend capture.
Dividend capture: Buying a stock just prior to its ex-dividend date (the date in which a new investor is not entitled to the most recent dividend) in order to capture the dividend and then selling the stock shortly afterward.
When investors engage in a dividend capture strategy, the idea is to own the stock just long enough to be paid the dividend. Then they move on to the next stock (although some might hold the stock for 61 days in order to avoid paying a higher tax rate).
Stocks that pay a high level of dividends are particularly attractive to users of the dividend capture strategy. A stock that pays a large dividend only once per year would definitely be on their radar.
This strategy is important because if enough buyers are interested in getting in right before the dividend is paid (whether they’re dividend capture investors or they plan on being legitimate long-term holders), the stock price will advance as more buyers come into the stock.
That’s a problem for the investor who is reinvesting dividends once per year. If the stock runs higher every time long-term investors are going to reinvest their dividends, their returns are going to be far lower than in a stock that isn’t attracting this attention right before the dividend is paid.
The dividend capture strategy isn’t directed just at foreign stocks. It can and does happen to American companies as well. But with four periods throughout the year and the fact that the dividend is broken up into four pieces, the likelihood of being severely impacted is lower than if you’re invested in a stock that pays out a 6% dividend once a year.