My friend Tim Plaehn never ceases to amaze me with his research. He recently wrote about stocks with a declared dividend, plus a variable dividend on top of it. Sounds cool…but….
I called him to share a bad experience. Right after the 2008 bailout, a mining company offered a guaranteed dividend increase based on gold prices increasing. As a new subscriber to Casey Research and Stansberry, who predicted gold would go through the roof, I jumped in. It didn’t work out.
When I did a post-mortem, I realized I didn’t do any real research. The company promotion was marketing-driven, hoping to boost stock prices. The gold and stock prices dropped. Investors flocked for the exits, me included.
Tim was very familiar with what I mentioned. He was ten steps ahead of me. He explained variable dividends are only a portion of the story, and something very fundamental has separated this new income opportunity into a category of its own.
It’s complicated until Tim explains it. We agreed to write about it and do a special webinar for our readers. Unfortunately, my recent health challenge caused me to miss my deadline.
Time for Tim to weigh in.
DENNIS: When we finished our discussion, I was excited. Tim, please give us some history on the variable dividend stocks.
TIM: Hi Dennis, for me, finding and recommending variable dividend investments is fairly new. The economic turmoil of 2020 pushed me to look at new ideas for income investing.
Starting late last year, I came across several companies that had announced new dividend policies that would pay out a larger portion of profits or cash flow to shareholders.
These were companies where results can and do vary from quarter to quarter. When times are good, they can be very profitable, and I liked the idea of companies sharing those profits with larger dividend payments.
DENNIS: You mentioned variable dividend payers are not new; yet you have carved out a special group. I’d like to break down the research criteria into smaller steps, first looking for candidates to fill your jar with potential candidates. Anything you want to tell us about in step one?
TIM: Finding variable dividend stocks requires keeping tabs on hundreds of dividend announcements. At this time, those stocks have come out of a few, commodity-based, market sectors.
Still, the variable rate idea is a very new phenomenon. It just takes a lot of digging to find the stocks. However, this gives you an advantage over investors who don’t know about variable dividends. Large dividend announcements typically surprise investors and produce nice share price gains.
DENNIS: Now I would imagine you have to cull the list. This sounded like a myriad to me. Here are some things I would imagine you consider:
- What separates any particular candidate stock from the herd? I like companies who clearly define how they will calculate the variable dividend rates.
- How solid is the underlying dividend? Similar to all Dividend Hunter stock recommendations? Variable dividends also protect the companies. They are not committed to paying out more than they earn if profits come up short for a quarter or two.
- Is the variable dividend formula realistic? That is where I got burned those many years ago. The variable dividend stocks I currently recommend pay attractive dividends based on their current business results. They are not based on some pie-in-the-sky future awesome projections.
- We both agree on selective diversification. Does this candidate stack up with other stocks in our overall portfolio? Variable dividend stocks can add a nice “pop” into your investment portfolio. However, they must be viewed as one investment theme in a broadly diversified investment plan.
Seems to me like it would take a ton of time; particularly if you get to the end of the line and it’s a thumbs down.
What is an eliminator? How do you research, sort through and use the information when making a recommendation?
TIM: Dennis, I primarily base my investment decisions on actual earnings reports and listening to management team conference calls to discuss those results. It takes time. I am a plodder when it comes to making investment decisions and recommendations. I gather as much “real” information as I can and base the decision on what I know about the company and other competing investment ideas.
DENNIS: So with these stocks, do you look through all of the variable rate payers and then pick one?
TIM: Not exactly. It’s not like there’s some reliable and authoritative list of variable rate paying dividend stocks you can just look up (maybe I should start one). Like I mentioned earlier, if I feel like my Dividend Hunter readers would benefit from another variable rate payer I start looking in sectors where they tend to cluster. These days they’re more likely to be found in the commodities sector than some other sectors. If I find one or a few I start digging into their financials, their dividend history, and especially their cash flow. Plus, making sure the “fine print” on the dividend makes sense and is actually achievable.
Often times however it can be the reverse: I find a stock I like for the portfolio – it ticks all of the boxes – and as a bonus for my readers, it has some sort of unique dividend payout.
So it really does work both ways.
DENNIS: Anything else we need to know about variable rate payers?
TIM: Yes, when evaluating them I apply the same stringent criteria you do with other dividend stocks. The dividend policy may be different but the same standards I apply to other dividend stocks under consideration – dividend history, cash flow, etc. – need to apply variable rate payers.
DENNIS: Thank you for your time.
TIM: My pleasure.
Dennis here. I am really excited about this and glad to see Tim put it in a special category. Basically, companies are paying us a fixed dividend and then a variable dividend on top of it.
I spoke with friend Rick G., who said there is likely a good percentage of readers who may not have known the opportunities exist. Companies are saying, in addition to the underlying fixed dividend, we will put us, the shareholders up front. We get our cut of the additional profits, before any additional profits can be used for other things like buying back stock. It is sure worth looking into. Yes, the index is based on the cycles, like gold, lumber or metals. Tim will monitor the cycles and so should we.
The webinar was last week, and you can view it HERE.
In addition, check below. Tim has offered new subscribers a nice discount.FREE: 10 Easy Steps To The Ultimate Worry-Free Retirement Plan
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