When you think of dividend stocks, it's likely The Walt Disney Company (DIS +0.15%) doesn't appear near the top of your radar. After all, shares of the company currently yield 1.6%, less than the greater S&P 500 yield of 1.9%.
But there's one way in which Disney truly stands out: Since 2012, the House of Mouse has more than doubled its dividend, rising at a nearly 16% annualized rate. Although it's become a business cliche, it's advisable for dividend investors to follow the advice of hockey great Wayne Gretzky and "skate to where the puck is going, not where it's been." In dividend investing, that means to look for companies with the ability and desire to increase their payouts in the years to come.
Still, there's one simple change Disney could make to become a more dividend-friendly company: change its payout schedule from semiannually to quarterly.
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Frequency matters
Investment finance can be a complicated subject, but it's based on a rather simple theory: Investors prefer higher cash flows, more frequent cash flows, and faster cash flows, all other factors equal. Compared with most companies in the S&P 500 that pay dividends on a quarterly basis, Disney's semiannual payout puts the company at a disadvantage to other large-capitalization companies in the eyes of income-oriented investors.
Colleague Dan Caplinger provides more detail on the company's dividend history that dates back over 60 years. Paradoxically, Disney once paid dividends quarterly, doing so when the company had less predictable cash flows because of the seasonal and cyclical businesses of theme parks and movie studios. When Disney started getting more of its revenue and operating income from its media networks segment (broadcast and cable TV), a business that has a lower variability profile than theme parks and movie studios, it chose to make less frequent payments, moving to annual payments in 1999 and then semiannual payments in 2015.
Simple is not easy
Simple does not mean easy. While the mechanics to buy or sell a stock appear seamless, behind the scenes there's a lot of work that goes into the process. Recording balances, transferring cash from buyer to seller, maintaining the owner of record, ensuring dividends are mailed and received, and properly accounting for splits and mergers is difficult, even more so when a company has approximately 1 million registered shareholders.
This process is easier when investors buy and sell stock at a brokerage, which keeps the shares in street name, and distributes dividends at the brokerage level. However, Disney has a large percentage of its shares in certificate form, which often requires that dividend checks be mailed out rather than electronically transferred. When Disney changed its dividend from quarterly to annual in 1999, it noted the cost of mailing dividend checks as the reason for the switch.
In 2013, however, Disney stopped performing these duties in-house and chose Broadridge, a transfer agent, to perform most of these tasks. In addition, the company stopped issuing stock certificates later that year. In 2015, presumably because the company undertook these money and time-saving steps, Disney changed its dividend payout from annual to semiannual.
Walt Disney has a lot going for it and income investors should take notice. Switching from semiannual to quarterly dividend payouts would be one simple way to attract income-oriented investors -- making the change and continuing to raise its dividend, as it has in recent years past, will make this stock a dividend powerhouse in the years to come.
