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« The Definitive Investors' Guide to the Mid-Term Elections | Main | October Employment Situation Preview »

November 03, 2010

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oldprof

Proteus -- I remember this well. Some of my friends (not clients) were involved in this. The tax change blindsided them.

It is difficult to anticipate everything, but foreign investments involve extra risks.

Thanks for the helpful observation.

Jeff

oldprof

Lurker-- Very good points! Thanks for your comments about the key criteria.

Jeff

Proteus

A dividend cut doesn't even have to be the companies fault. Those of us who owned Canadian royalty trusts (which had yields of 7 to 10%) a few years ago also found out that large capital losses can happen to good companies overnight, with just a minor change to the tax code.

Apparently some Canadians had the majority of their assets in these trusts, which must have really hurt.

Lurker

Add "earnings quality" to payout ratio and dividend history. You want operating cash flows well above net income and you want to see that dividends are financed (or could be completely financed) through operating flows and not through debt issuance (repatriation of foreign profits can be an issue here).

Most of the gurus saying "Why own a bond when you can own stocks?" are expressing perplexity over the market for bonds, which is institutional and driven by accounting and regulatory concerns (ALM, pension funding regs, risk charges on surplus for holding equities, marking investment grade bonds at amortized cost rather than to market, etc.). They see companies issue debt below their dividend yields and don't understand why there's a market ther, because they are thinking "retail" and not "institutional."

There is a key point to remember, and that dividend yields can be cut, while bonds represent claims on assets that are harder to eliminate. Your "high yield is likely to cut dividends" companies may pay off better if you buy their debt instead of their stock, whereas if you're buying stocks for dividends, it's better to aim for other companies that have sustainable albeit lower dividend yields.

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