After diving into Windstream Holdings' (NASDAQ:WIN) updated plans to spin off an asset-heavy real estate investment trust, I received an email from one of my readers. The reader -- let's call her Betty -- was concerned about what might happen to her generous Windstream dividends when the REIT spinoff takes place.
I'm thinking that other readers might share Betty's worries, so I'm here to address them for everyone.
Let's start with Betty's biggest worry: What happens to Windstream's dividends when the stock goes through a reverse split?
"As a senior citizen dependent upon dividends, I'm concerned that Windstream's reverse split will dilute them. Windstream pays $1.00 a share which is the reason why I've kept it, all of these up-and-down years.
"What happens to the dividend after the reverse split? With fewer numbers, will the dividend become $2 a share, which doesn't seem likely, or will the dividend stay at $1, reducing my income by half?"
In general, stock splits and their reverse siblings normally don't affect your dividend payouts at all. For a real-world example of what I mean, let's look at IBM (NYSE:IBM).
Way back in the spring of 1997, Big Blue paid out a dividend of $0.40 per share. This quarterly check went out on June 10, addressed to shareholders of record as of May 10.
On May 27, IBM shares went through a regular 2-for-1 stock split. IBM investors suddenly had twice as many shares. The next dividend payout was for $0.20 per share -- balancing the doubled share count against half the dividend payout per share.
The net effect to IBM's dividend yield and to each shareholder's final tally was zero. Share prices halved alongside the larger share count, keeping the effective dividend steady as well. And if you were used to $0.40 per share for a cache of 1,000 IBM shares, the new dividend payment was $0.20 per share on 2,000 stock certificates. Either way, you were looking at $400 per quarter.
The same thing happened again in 1999, when IBM's stock split again. Before the split, quarterly dividends had risen to $0.24 per share. That's $0.48 per share bought in early 1997. Afterward, the payouts dropped to $0.12 per share. That still worked out to exactly $0.48 per early 1997 share, or $480 for our hypothetical investor. The only difference was, the holding had risen from 1,000 shares to 4,000 stock certificates.
During this time, IBM's dividend yield fell dramatically -- but not because of the stock splits. Rather, the yield plunged because IBM's share prices kept rising in the preface to the dot-com crash in the early 2000s. And the effective dividend payouts climbed like clockwork:
So, no, Windstream's reverse split won't affect Betty's payouts at all. These are mechanical exercises with very little effect on the real value of your investment.
The real difference-maker
What will change the payout, however, is that Windstream is splitting itself into two distinct businesses with separate stock tickers, and they will have very different dividend policies.
Current Windstream shareholders will keep their existing shares and also be awarded a "commensurate" (and probably equal) amount of shares in the new REIT operation. The stock is also slated to perform a 6-for-1 reverse split, most likely before the REIT spinoff.
I do have some bad news for Betty. When the REIT transaction is complete, Windstream expects the total dividend payouts between the two publicly traded stocks to add up to $0.70 per pre-REIT share. The REIT operation is expected to deliver annual dividends of $0.60 for each of the shares you hold today, and the service-oriented stock stops at $0.10 per current share.
This is not an effect of the reverse split, however. With only one-sixth as many shares in circulation, the payouts per share will also multiply by 6. No, it's simply how the dividend cookie crumbles under the new, two-company business plan. Some of the cash that goes into dividends today will be used to retire $4 billion of debt.
Moving forward, income-focused investors might want to consider selling their shares in Windstream's service-minded business and buying more of the dividend-focused REIT instead. All else being equal, that would actually increase the dividend-earning power of an investor's current Windstream investment to $1.20 per current share. The other stock might be more suitable for growth investors, with plans for only a small dividend policy.
Long story short
I hope that clears up how the reverse split affects Windstream's revamped dividend plan. To reiterate, the reverse split won't make a difference while the REIT spinoff changes the game in many ways -- including how the dividends will work.
Signing off, Betty asked for one more crucial bit of information: Where do you go to find out about dividend reductions, preferably before they happen?
There's no single point of contact for this sort of thing. Some companies announce their intention to slash dividend payments way ahead of time -- such as Windstream's upcoming reduction of total payouts per current share. Keep an eye on the company's investor relations site for an unfiltered and often overwhelming flood of information like this.
But that's kind of rare. In most cases, the company is under no obligation to keep investors abreast of future dividend plans, and tipping your hand like that could be seen as a competitive weakness.
Therefore, you often have to settle for informed guesses and estimates. For a bit more guidance, I'd recommend finding a media outlet that keeps close tabs on your favorite dividend stock. In the case of Windstream, I'd humbly suggest our own coverage here at The Motley Fool.
Anders Bylund has no position in any stocks mentioned. The Motley Fool owns shares of IBM. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.