If you’ve been reading these articles on my website, you already know that I like reliable, consistent and increasing dividends. So much so that when I’m looking for new companies to invest in I look first at the list of Dividend Aristocrats. In case you’ve somehow forgotten, Dividend Aristocrats are blue chip companies listed in the S&P 500 index with large market capitalizations that have increased their dividends annually for a minimum of at least 25 consecutive years. Quite a unique group of companies, right?
Dividend Aristocrats tend to take part of their earnings and distribute them by way of dividend payments. The remainder of the earnings are then plowed back into the company to grow the business and hopefully increase future earnings. Increased future earnings hopefully will produce increased future dividends. It is these perpetually increasing dividends that are so seductive to the average investor. It’s the dream of not only living off dividends but of living off an increasing flow of dividends equal to or greater than the annual inflation rate. It almost seems like the impossible dream but thousands of people do exactly this every day in America. And I want to be one of those people someday.
For me, the Dividend Aristocrats are the road to success, security and independence. Fortunately I’m on that road but unfortunately I haven’t obtained my goal. Like most people I wish I knew 50 years ago what I know today, but it took me 50 years to learn it (I’m not the brightest star in the sky!). Hopefully my kids will read this one day and learn these ideas years earlier than I did.
Dividend Aristocrats tend to take part of their earnings and distribute them by way of dividend payments. The remainder of the earnings are then plowed back into the company to grow the business and hopefully increase future earnings. Increased future earnings hopefully will produce increased future dividends. It is these perpetually increasing dividends that are so seductive to the average investor. It’s the dream of not only living off dividends but of living off an increasing flow of dividends equal to or greater than the annual inflation rate. It almost seems like the impossible dream but thousands of people do exactly this every day in America. And I want to be one of those people someday.
For me, the Dividend Aristocrats are the road to success, security and independence. Fortunately I’m on that road but unfortunately I haven’t obtained my goal. Like most people I wish I knew 50 years ago what I know today, but it took me 50 years to learn it (I’m not the brightest star in the sky!). Hopefully my kids will read this one day and learn these ideas years earlier than I did.
"The time to save is now. When a dog gets a bone, he doesn’t go out and make a down payment on a bigger bone. He buries the one he’s got." |
Another type of company that I am attracted to are that subset of companies that pay out the majority of their earnings in the form of dividends and retain very little of their earnings for increasing the business yet somehow they continue to maintain or increase slightly their revenue and earnings. While these companies won’t increase my wealth through capital appreciation, they will provide a significant income in the form of dividends from which I can secure an additional equity position in a dividend producing company or additional dividend income to support my retirement lifestyle.
These types of companies generally fall into three categories: Master Limited Partnerships (MLP), Business Development Companies (BDC), and Real Estate Investment Trusts (REIT).
MLPs are a unique type of business organization. In order for a publicly traded company to be considered an MLP the company or partnership must derive approximately 90% of its cash flows from real estate, natural resources or commodities. The advantage of being organized as an MLP is that it combines the tax benefits of a limited partnership with the liquidity of a publicly traded company. A limited partnership does not have to pay taxes from the company’s profits because approximately 90% of the profits and all of the tax liability is passed to the individual unit holders when they receive their distributions and pay their individual taxes. Limited partnerships normally have two types of partners. The first one is a limited partner who is the person or group of persons that provide the capital to the MLP and receives periodic income distributions from the MLP's cash flow. The second type is a general partner who is responsible for managing the MLP. The general partner receives either a fixed fee or receives compensation that is tied to the profit of the underlying business.
These types of companies generally fall into three categories: Master Limited Partnerships (MLP), Business Development Companies (BDC), and Real Estate Investment Trusts (REIT).
MLPs are a unique type of business organization. In order for a publicly traded company to be considered an MLP the company or partnership must derive approximately 90% of its cash flows from real estate, natural resources or commodities. The advantage of being organized as an MLP is that it combines the tax benefits of a limited partnership with the liquidity of a publicly traded company. A limited partnership does not have to pay taxes from the company’s profits because approximately 90% of the profits and all of the tax liability is passed to the individual unit holders when they receive their distributions and pay their individual taxes. Limited partnerships normally have two types of partners. The first one is a limited partner who is the person or group of persons that provide the capital to the MLP and receives periodic income distributions from the MLP's cash flow. The second type is a general partner who is responsible for managing the MLP. The general partner receives either a fixed fee or receives compensation that is tied to the profit of the underlying business.
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BDCs are companies that are created to help grow small companies in the initial stages of their development. BDCs are very similar to venture capital funds. Many BDCs are set up much like closed-end investment funds and are actually public companies that are listed on the NYSE, AMEX and Nasdaq. A major difference between a BDC and a venture capital fund is that BDCs allow smaller, non-accredited investors to invest in startup companies. Some of the reasons why BDCs have become popular is that they provide permanent capital to their management, allow investments by the general public and use mezzanine financing opportunities.
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REITs are securities that sell like a stock on the major exchanges and invest in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate. REITs invest in shopping malls, office buildings, apartments, warehouses and hotels. Some REITs will invest specifically in one area of real estate - shopping malls, for example - or in one specific region, state or country. Investing in REITs is a liquid, dividend-paying means of participating in the real estate market. REITs are created for any one of the following three reasons.
(1) Equity REITs: Equity REITs invest in and own properties (thus responsible for the equity or value of their real estate assets). Their revenues come principally from their properties' rents.
(2) Mortgage REITs: Mortgage REITs deal in investment and ownership of property mortgages. These REITs loan money for mortgages to owners of real estate, or purchase existing mortgages or mortgage-backed securities. Their revenues are generated primarily by the interest that they earn on the mortgage loans.
(3) Hybrid REITs: Hybrid REITs combine the investment strategies of equity REITs and mortgage REITs by investing in both properties and mortgages.
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