Dividend Investing Is a Fad

Talk of dividends is everywhere lately. On Fool.com alone you can see plenty of evidence of that. Last week, Dan Caplinger gave us "5 Dividend Stocks You Shouldn't Go Without," Jeremy Phillips told us about his favorite dividend stock, and Tim Beyers and Ilan Moscovitz explained why Berkshire Hathaway (NYSE: BRK-B  ) is the most unlikely dividend play.

But why are investors suddenly so fixated on dividends? A week ago, I took a look at what economist Gary Shilling had to say about the economy and the investment landscape. It wasn't pretty, but I think he has a pretty good handle on why many investors are turning to dividends -- namely, they are concerned that capital gains will be hard to come by in the years ahead, and they believe they'll have to count on dividends for most of their returns.

More generally, though, I think investors have had the fear of God put in them by the recent crash, and after seeing their accounts decimated and valuations go haywire, they like the idea of tangible returns. And dividend payments that roll in every quarter are nothing if they're not tangible.

But it won't last
As a broad group, investors are a fickle bunch that tend to jump on the latest trend faster than you can say "Justin Bieber." At the end of the millennium, you had to own tech. Then, when the tech bubble was bursting, finance and homebuilders were where it was at. We had a spike in oil toward the tail end of the housing debacle, and you were crazy not to own energy stocks because we'd reached peak oil and no price for oil was too high.

Now, today, the world is a changed place, a bleaker place, and dividends are now the investment must-have.

At some point, though, probably in the not all too distant future, that'll change again. Natural resources and metals stocks already have significant momentum as do emerging-market stocks -- especially in the BRIC countries -- so maybe one of those groups will soon be all anyone wants to hear about. Or perhaps the Fed's stimulus will have the intended effect of jacking up growth, and suddenly everyone's mouths will be watering over high-growth stocks. Or perhaps it'll be something that's only peripherally on the radar right now, like nanotechnology.

But the point is, dividends will be once again forgotten like, um, Justin Bieber (just wait a few years, people; "cute" doesn't last).

The dividend crash course
Personally, I think dividend-paying stocks should always be (at least) a core piece of investors' portfolios. A solid history of dividend payment says a lot about a business and the management team that runs it. Plus, dividends account for roughly 40% of the stock market's returns, so if you miss out on dividends, you put yourself at an immediate disadvantage.

Now let's assume you are getting interested in dividends right now. Maybe you'll find the true joy of a company that pays you and end up making dividends a central part of your investing for the rest of your life. Or perhaps you'll end up getting really excited about dividends for a few years and then realize that nanotech stocks are where the real money is at. Either way, what you need is a way to dive into dividends right now without putting your portfolio in hot water.

With that in mind, here's my three-step dividend crash course.

1. High yields aren't always good yields
I've said it myself -- high-yield stocks can be very solid performers. However, the temptation for many new dividend investors is to head straight for the companies with the very highest yields. Right now that means companies such as American Capital Agency (Nasdaq: AGNC  ) , Chimera Investment (NYSE: CIM  ) , Invesco Mortgage Capital, and Annaly Capital (NYSE: NLY  ) , which all have yields north of 15%.

But while Annaly has been around for a bit more than a decade and is a favorite of many of my fellow Fools, what most of these companies have in hefty dividends, they lack in any sort of real track record. All of these companies invest in mortgage paper of some sort, a business which has become extremely popular lately because of the low-rate environment. But with the exception of Annaly, most of these companies have histories no longer than our friend Mr. Bieber's career.

There are good high-yield opportunities, but there's nothing wrong with sticking to more moderate, but reliable, yields for the bulk of your portfolio.

2. An affordable payout
Ideally, you want a company that can afford to pay its dividend -- and, even better, grow it -- year in and year out. It's easier for a company to do that when its dividend payouts don't overwhelm its cash flow. A good picture of a less-than-ideal situation is Nordic American Tanker (NYSE: NAT  ) , where there's very little cash flow available to pay the dividend, so the company makes it a practice to issue loads of new shares every year. That means the dividend is only as sustainable as the market's appetite for an endless dilution treadmill.

There are examples to the contrary. Dividend dynamo Altria (NYSE: MO  ) , for example, has a dividend that sucks up just about all of the company's cash flow. But to be a high-percentage batter in the world of dividends, you'll generally be better off looking for companies whose cash flow covers dividend payments multiple times over.

3. Diversify
Yes, it sounds like dull, hackneyed investing wisdom, but investors don't have to look to ancient history to find good reason to diversify where they're getting their payouts. Prior to the financial crisis, banks were considered a staple of the dividend universe. But for investors who decided to concentrate their portfolio on banking stocks, the results have likely been disastrous. Not only have the prices of many banks fallen, but a great many, including Bank of America and Citigroup (NYSE: C  ) , are either no longer paying a dividend or have a laughably low payout.

From boring old utilities to retail and tech, you can find dividends pretty much everywhere, so there's no reason to have your entire portfolio hinging on one industry.

With any luck, I'll be proved wrong and investors will hang onto their newfound love of dividends. But even if that doesn't happen, the three points above can help you make sure only worthwhile dividend stocks are making their way into your portfolio for as long as the love affair lasts.

Want some ideas on what dividend stocks you should invest in? My fellow Fools have put together a free report with their favorite 13 dividend payers.

Berkshire Hathaway is a Motley Fool Inside Value recommendation. Berkshire Hathaway is a Motley Fool Stock Advisor pick. The Fool owns shares of Altria Group, Annaly Capital Management, Bank of America, and Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer owns shares of Berkshire Hathaway, but does not own shares of any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool's disclosure policy assures you that Wookies are not a fad.


Read/Post Comments (31) | Recommend This Article (62)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 23, 2010, at 12:04 PM, woo131 wrote:

    Fool always states that buying stocks is actually getting ownership in a company, but what reward is there for the owner (as opposed to the management) ? You get capital gains and dividends, but capital gains is always uncertain. Capital gains has been compared to participating in a Ponzi scheme, hoping you can sell your shares to a dope (someone dumber than you).

  • Report this Comment On November 23, 2010, at 2:26 PM, PeyDaFool wrote:

    Matt,

    Interesting article. I never thought of dividend investing as a fad before (and I still don't want to necessarily believe it), but you sure do make a convincing argument.

    I've read a read a few articles lately on seekingalpha.com and there are quite a few dividend investors who are unhappy about the recent popularity in dividend investing because it may bring undue volatility when the "fad" goes away.

    Any thoughts on what the next fad might be?

  • Report this Comment On November 23, 2010, at 4:52 PM, TMFKopp wrote:

    @woo131

    I'm not quite sure what you're getting at, but it would seem that you agree with me. That is, my take is that investors should _always_ be looking for dividends in at least some of the stocks that make up the core of their portfolio. I don't think dividends should be a fad, but I can't help but think the recent attention is pretty faddish.

    @truth

    It's a tough call... a continued fad could kill opportunities, but at the same time I'm always rooting for individuals to take a smarter approach to their investments.

    @PeyDaFool

    Yeah, that's a good question... Personally, I'm rooting for nanotechnology to come out of nowhere and get everyone really excited. But really it could be a host of things. Materials, China, India, alternative energy, flying cars (fingers crossed!), vertical farming... and the list of candidates goes on.

    I think of it like the classic movie distraction tactic, pointing and yelling "Look over there, it's Tom Cruise!" Then, when everybody jumps to go after nano or solartech or whatever it is, I'll have even more dividend opportunities to choose from.

    Matt

  • Report this Comment On November 23, 2010, at 5:44 PM, goalie37 wrote:

    Fads come and go. If you have a solid system built to last over decades, the trends will be irrelevant. I invest in dividend paying stocks for two reasons - 1) I don't have much of an income, so dividends allow me to buy more shares than I would by my paycheck alone. 2) Someday I will be able to supplement my anemic income with dividends, and not by selling stock.

  • Report this Comment On November 23, 2010, at 6:21 PM, jm7700229 wrote:

    I am amused by the fads, which have never hurt me. I saw the P/Es on tech stocks in the late '90s and took my gains (my wife nearly divorced me over that). I saw 25 year olds getting half million dollar interest only 100% (and more) loans, and got out of financials (except GE -- ouch! that one hurt). I rode the oils and watched the market and got out.

    I am not a brilliant investor or a seer. I just watch my fundamentals and not the movement of the crowd. And I'm way ahead of the game. Dividends aren't a fad: they've been around a long time. If dividend stocks are overbought, the yield will drop and I will cash in and wait for the inevitable fall back. But I don't really think that's going to happen. I'll be watching, though.

  • Report this Comment On November 23, 2010, at 6:55 PM, OlimDives wrote:

    One thing that frustrates about articles like these is they seem not to take into account age. If you are like me, and in your early to mid 20's then undervalued, historically safe dividend stocks with growth potential are exactly what you should be buying. If you have 40+ years to retirement, you should be buying the stocks that continued to increase payouts even during the recession. Enroll them in DRIP's and leave them for 40 years and it won't even matter what the share price does as long as you keep a close watch on the dividend safety structure. Companies that did not slash dividends during this recession are a good place to be for the long term. If they have not cut in 40 years, you have a good chance they may go another 40. Compound interest is the most powerful tool an investor can use to his or her disposal. Anyone who ignores this is ignorant.

  • Report this Comment On November 23, 2010, at 7:13 PM, energysystems wrote:

    Olim-I'm in the same boat as you. 25, and a firm believer in not only investing in dividenders, but re-investing my dividends. Right now, I have no use for a quarterly check; so I'm rolling them right back into the investments I have. I'm personally suprised whenever I talk to friends about investing, and they have no idea about dividend investing and compounding interest. To be honest, it's an investing philosophy that I learned as a youngster from my Grandpa. Some may call it a fad, and that's fine. But I'm sticking with it, it's proven over time to give you more return then any other formula.

  • Report this Comment On November 23, 2010, at 9:09 PM, NiceGuyMax wrote:

    I think people are sick of being played and now want to see the money. Dividends shows them the money.

    Dividend histories and payouts can be tracked. Too much noise in the media which is untrue or used to pump a stock or sector.

  • Report this Comment On November 23, 2010, at 11:22 PM, caltex1nomad wrote:

    Who's Justin Bieber ?

  • Report this Comment On November 24, 2010, at 12:18 AM, Notfooled1 wrote:

    You youngsters do not remember when dividend payouts were a NEGATIVE. The theory then was that a well-run company should have better use for its money than paying it out to investors. So stocks like IBM that paid a dividend of less than 1% soared, while U.S. Steel tanked.

    Now, with fear ruling the markets, the tide has turned. Bull or bear market, if you buy solid companies and pay no attention to dividends or lack of same, you will do very well.

    The fools, motley or otherwise, will back the latest fad. Right now it is dividends. Ignore them, stand fast, and build the best possible portfolio.

  • Report this Comment On November 24, 2010, at 3:16 AM, mattp2010 wrote:

    I think the main purpose of the article is to point out the huge number of articles discussing dividend paying stocks. It seems every financial news outlet you see is discussing the need for dividend paying stocks (perhaps partially due to the abysmal yields on bonds).

    The author indicates that dividend stocks are an important part of any portfolio. However, dividend paying stocks are not the only piece of a diversified portfolio. A growing company may keep the funds for capital expenditures or for research and development (I agree with Notfooled1 on that piece). Purchasing only dividend paying stocks may lead some investors to ignore potentially great growth stocks and other opportunities

  • Report this Comment On November 24, 2010, at 3:42 AM, depsee wrote:

    Way I see it over the past 20 years, stupid investors were left brainwashed thinking that a minimal dividend might be good, but MAYBE NOT! I WOULD MUCH RATHER SEE THEM USE THE MONEY TO GROW THE COMPANY THAN GIVE IT TO ME!

    Thats stupid. Insiders such as CEO's, CFO's, and what ever else take their dividends in the form of stock options, bonus, company perks, ect. The real idea of investing is to share the profit of the endeavor, what happened to that?

  • Report this Comment On November 24, 2010, at 4:03 AM, TMFKopp wrote:

    @Notfooled1

    "Now, with fear ruling the markets, the tide has turned. Bull or bear market, if you buy solid companies and pay no attention to dividends or lack of same, you will do very well."

    Part of finding solid companies is finding companies that 1) know how to allocate capital and 2) remember who really owns the company. The "dividends or lack of same" tell you a lot about the folks running the company and I think you ignore that at your own peril.

    @mattp2010

    You've kind of got it. More what I was shooting for is -- like you said -- to highlight the hoopla around dividends and to give investors a good way to ease themselves into investing in dividend stocks.

    A common problem with investing fads is that many investors want to dive headfirst into the bleeding edge of whatever the fad is. If it's energy, they want the highest-beta, do-or-die energy companies. If it's internet stocks, then they want to growthiest, internetiest companies out there. And if it's dividends, they want the stocks with the outlandishly high payouts.

    Let's just say that that's a suboptimal approach...

    Matt

  • Report this Comment On November 24, 2010, at 4:09 AM, TMFKopp wrote:

    @truth

    "I think Justin Bieber is that cute talking baby you see on those clever E-Trade commercials."

    Hahaha! It's very refreshing that not everyone knows the Bieber. I think I must spend too much time listening to top 40 radio...

    For those curious -- http://www.youtube.com/watch?v=kffacxfA7G4

    Keep your finger on the back button though, I can typically stand about 26 seconds before I have to turn it off.

    Matt

  • Report this Comment On November 24, 2010, at 5:57 AM, depsee wrote:

    My last post evaperated

    Mike.

  • Report this Comment On November 24, 2010, at 10:22 AM, OldPecksniff wrote:

    Ignore this article. High paying dividend stocks have been a safe harbor.

  • Report this Comment On November 24, 2010, at 11:46 AM, mpendragon wrote:

    Investing just ahead of the business cycle seems like a reasonable technique.

    When the economy is down and demand for materials is low buy into materials. When the material demand starts to pick up buy financials who are lending to the firms turning those materials into products. Then buy into consumer goods and start selling off materials and financials. When inventories start to build up with consumer goods then you can start moving into stable dividend stocks during the likely slide and wait for the economy to fall off some to buy back into materials.

    I'm not suggesting that someone shouldn't remain generally diversified but weighing your investments ahead of the business cycle seems like it could pay off (or it could just be a variation on trying to time the market).

  • Report this Comment On November 24, 2010, at 1:50 PM, brizzlekizzle wrote:

    I used to buy shares of GLP back in 2008 because the dividend was over 25% and they just kept delivering. It sure beat the .0000001% my bank was offering. I have respect for dividend investments, I think that some companies are comfortable with a slow growth rate and paying out most of the profit. It is a good way to receive your investment profits as they come, not all at once.

  • Report this Comment On November 24, 2010, at 8:47 PM, TMFKopp wrote:

    @OldPecksniff

    "Ignore this article. High paying dividend stocks have been a safe harbor."

    Haha, tell me how you really feel! Are you referring to dividends in general or high-yielders?

    As far as dividends in general, I agree with you that they're a good place for conservative investors to always look. But that doesn't change the fact that the recent attention is very likely a fad.

    @mpendragon

    "or it could just be a variation on trying to time the market"

    Yes, what you've described does sound like a variation on market timing. A lot of folks try to do what you're talking about, some are probably successful with it, but I've always found that being a little more boring and relying less on the ol crystal ball is a better bet.

    Matt

  • Report this Comment On November 24, 2010, at 9:48 PM, targetphil2 wrote:

    MF should allow you to REC more than once on outstanding articles and comments, if that was the case i would REC this as many times allowed

  • Report this Comment On November 25, 2010, at 11:47 AM, vgaymer wrote:

    You can write as many articles about dividend investing as you want. As long as people don't bid the share price up so the yield lowers substantially, I don't care.

    G

  • Report this Comment On November 26, 2010, at 11:16 AM, LegalizeMe wrote:

    Three things I look for when buying dividend stocks:

    1) Payout history

    2) A reasonable dividend (usually between 3-7%)

    3) A business model I can understand

    The business models for some of the higher dividend stocks are far too confusing for me. If I can't explain how a company makes money I have no business buying their stock.

  • Report this Comment On November 26, 2010, at 5:13 PM, bobmar46 wrote:

    Dividends are not a fad; dividends are a necessity for many retirees and many of those about to retire. Lessons learned from two crashes in recent years prove that it is not reliable to count on growth for income. Most people have less to invest and have to make what is available count. Other than going with junk bonds, most bonds yield less and are currently taxed at a higher rate. Yields equal to or less than inflation do not make a lot of sense.

    The market has recovered 79% since the market bottom and is up 14.9% this year. Those numbers are not bad, but my mix of stuff that is weighted 80% in dividend paying stocks is up at a 65% higher rate since market bottom and 55% higher rate this year. Some of that difference has been dividends, but it also proves that dividend stocks do not have to be slower in growth than the market. During the last 8 years of dividend investing average dividends were never lower than 9.5% and during most of those years my growth has surpassed the market.

    I believe that dividend investing is not a fad, but the new reality for many of us in a future of minimal growth.

  • Report this Comment On November 26, 2010, at 5:28 PM, bobmar46 wrote:

    @vgaymer

    “You can write as many articles about dividend investing as you want. As long as people don't bid the share price up so the yield lowers substantially, I don't care.”

    The actual dividends received are dependent on consistency in payout, not the yield against current pricing. If you bought a stock with a 10% yield when you bought it, the stock doubles in price but ACTUAL dividend payment does NOT change, the yield drops to 5%, but the amount you receive in dividends does not change.

    This type of situation can be good in that frequently the stock can be sold booking the profit and reinvested in something else that yields more at current pricing. That is a win win.

  • Report this Comment On November 27, 2010, at 11:01 AM, jpc1591 wrote:

    I don't think dividend investing is so much a fad as people - especially baby boomers approaching retirement - coming to the realization that there is a great cash flow for them to enjoy in their golden years.

    That's what I was looking for when that realization struck me last year. A year away from being able to tap into my IRA, I was trying to figure out how to set up a guaranteed (or as close as possible to guaranteed) income stream using my retirement account.

    I investigated annuities and decided the fees were prohibitive. Municipal and Corporate Bonds were more attractive but even though they promised cash flow they were too ill-liquid and the principal didn't grow over time.

    Then I began looking at dividend stocks and decided that was the way to go. Initially I did what alot of others probably do and bought a bunch of high yield dividend companies. But over the past year I've learned an enormous amount about what makes a good dividend stock. (I look at PE, ROE, PR - payout rate - dividend history, among other things) and have dumped many of my initial investments and realigned my portfolio so that I'm comfortable most of my holdings will continue paying out healthy divs well into the future.

    I've spread my holdings over several sectors - investment, energy, utilities, communictions, food, insurance, tobacco, pharma, natural resources, consumer goods and shipping.

    I wish I'd been savvy to the benefits of dividend stocks when I began investing 25 years ago. I've been talking to my kids about buying dividend stocks now when they still have a 25-30 year time horizon before they tap into their IRAs. If they buy dividend Aristocrats now - companies that have good bottom lines and have steadily increased their dividends without fail over 25 years or more, like PG, MO, T, VZ, CL, LLY, MRK, BMY, JNJ, etc) by the time they begin touching that IRA money they could be collecting 10%+ yields for the rest of their lives.

    The other benefit is that as more investors become aware of the logic of owning div stocks, the market value of those companies will only increase. Dividends are not a fad!

  • Report this Comment On November 28, 2010, at 4:26 PM, busterbuddy wrote:

    Dividend investing is not fad. And while the writer of this article has valid points about investing in high yielding stocks that pay out a large amount of their capital is well, not smart, is valid. But that is about all that is valid. And to be very frank, not Barniee Frank, Investing in Dividend paying stocks is the only sound way to invest. Investing for Capital Gains is risky and always provides you limited long term returns. Oh disagree, well the problem with investing for Capital gains is 1. you have to get them. And 2. you have to take them. And 3. You have to find them again. The industry has made a fortune trying to get you to do this and present investment banks are still trying it via derivatives, option spreads, and hedge funds. But in the long run it is just bad investing. If you do the math, properly, There is no better return than dividend investing with dividend reinvestment. You want to buy into the cash flow and get some of it returned to you. Doing anything else is just stupid. The tax code should be written to reward long term investing and punish short term gambling. The world would be a better place and then we would be using the market for what is was meant, Raising capital to build products. And not as gambling casinos for the likes of Wall Street investment bankers.

  • Report this Comment On November 29, 2010, at 6:19 PM, neamakri wrote:

    I love dividends. Let's compare two investing methods:

    =====gambling on stock prices=====

    GOOD: happy when prices go up

    BAD: (1) you must constantly track prices, trends, stock fear factors, etc. (2) you worry all night that something bad will happen. (3) distraught when prices go down. (4) the gain in any stock can only be realized within that stock. (5) your gain can only be realized when you sell.

    =====buying reliable dividend payers=====

    GOOD: (1) you seldom worry about the stock price. (2) you sleep worry-free all night. (3) you are happy multiple times per year as each stock pays you dividends. (4) dividends received can be reinvested in any stock you wish! (5) you get dividends and you get to keep the stock! (no need to sell)

    BAD: nothing.

  • Report this Comment On December 02, 2010, at 8:53 AM, 57andrew wrote:

    "Fad" is a poor choice of words. I am 53 and hope to retire at 55. I want a steady income. If I can get a 5% yield in real terms I shall be happy. Capital appreciation is all upside. So I have a pension fund, which I manage and any spare cash outside the fund I can be a little more adventurous with if I choose. The pension fund is currently mainly in dividend stocks spread well geographically and focussed on blue chips in strong currencies and, currently, over 50% cash. The dividends are anything from 3 to 6% - REITS pay the best yields at present. Why is this faddish? I have read Gary Schilling's book "The Age of Deleveraging" and Vitaliy Katsenelson's "The little book of sideways markets." I have no idea if the deflation prediction is right but I sure as eggs don't feel like betting against it. There are enough speed bumps ahead to frighten most savvy investors and I think a defensive (dividend paying) portfolio makes perfect sense right now. Ultra-high divis should ring alarm bells but any stock screener will throw up some rock solid stocks with >4% yield. Buy the dips :-)

  • Report this Comment On December 03, 2010, at 2:16 PM, MattZN wrote:

    You know in late 2008, post-crash, there was a clear advantage to investing in dividend-producing stocks whos yields had jumped well over 8% (and in several cases well over 15%). When the market goes crazy like that and investors penalize stocks to the same degree, whether they have dividends or not, then people investing in that environment would be fools not to throw a large chunk of their funds into a divvy-producing stocks. It's hard to beat massive appreciation potential coupled with high distributions all in the same ticker symbol!

    In the intervening 2 years since that incredible period I've listened to media report after media report screaming about how investors were all in cash in low-yielding bank accounts and how they couldn't find yield any more and I was scratching my head because I was sitting primarily in MLPs yielding north of 8% with plenty of appreciation potential on top of that. All because the mob mentality of the market threw away common sense thought everything was going to go bust. Stupidity goes hand in hand with panic, I guess.

    Where are we today? The dividend argument is not quite so clear cut as prices have appreciated and yields have gone down. We could very well be cycling back into a period where capital growth is in the catbird's seat. Even so, I see dividend-producing equities as being a major moderating factor in the new now. Investors aren't as stupid as they were in 2009... yield does count for something to the rabble, again, which means that having a nice secure dividend, even a small one, will have a large positive effect on reducing the volatility of your base investment position. That matters a lot more to me now.

    -Matt

  • Report this Comment On December 05, 2010, at 5:33 AM, 57andrew wrote:

    Matt, good comment. I am not sure whether MLPs are accessible to Asian investors like me but if they trade on an exchange I guess they are. Certainly worth exploring although the yields have come off too - I l looked at AMJ and the yield is a fraction over 5% and there are still good blue chips paying that although they are getting fewer. I think the answer is review and rebalance regularly.

    Andrew

  • Report this Comment On December 11, 2010, at 8:00 AM, rw1270 wrote:

    It is quite hurtful when people who pose as experts either don't read documents or don't know how and then they make claims like NAT has little cash flow to support its dividend and pays it from the secondaries. NONSENSE!!!

    Unlike the author, I actually bothered checking financial statement of NAT. Let's look at last quarter, shall we? They paid 25 cents of dividend. The GAAP loss was 12 cents. How did they come up with 37 cents? Simple - AMORTIZATION (or depreciation). It's an "expense" that actually happened prior the quarter (well they both ships, didn't they - actually a lot of theym, went from three to 18 in ten year), but the company can only write off a fraction of that per each reporting period. This quarter it was $15.9M/46.9M shares = 34 cents. So they added 3 cents or so from their current cash. And that can be traced quarter by quarter.

    The secondaries are used to buy ships, not finance dividend. Unlike most businesses (and people), they finance expansion (new ships) not by debt or earnings, but thru new stock offerings. In other words they pay current shareholders entire free cash flow (more-less GAAP profit plus depreciation) and invite new shareholders when they can buy new ships at opportunistic prices. So far it works because potential earning power of new ships grows faster than share count, i.e. new purchases are still accretive. It may change once they get big enough, but not quite yet.

    Their dividend will always float, sometimes dramatically up or down, not because offerings, but because volatility of rates. They don't engage in hedges, they don't have charters. It's all spot market. This model works for them, as there is no (very little to be precise) debt to pay every month, hence if market is down, earnings/dividends go down, but no threat of bancrupcy. When rates go up, dividends explode.

    It seems this company's model (full cash flow payout, small debt, fleet expansion financing through offerings) is so different that everybody else (let's put boatloads of debt, commit to a set dividend payout and hope for the best). Many simply don't get it, including the Author.

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