Market Musings Blog

Dividends 101

Quick: what is the difference between income and principal? While most people know vaguely that principal has to do with what you originally deposited in an account, and income is what is paid on that principal, these definitions can get pretty muddy over time as values in your account change.

Let’s say you deposit $100,000 in an investment account, and you buy ten stocks. All of them rise 10%. You now have $110,000. Is that extra $10,000 income, or principal?

It’s principal. So although you can think of principal as what you originally deposited, that value changes over time. In tax terms, the $10,000 is capital gain, but it’s still part of your principal.

Now let’s say that all ten stocks pay you $1 in dividends (to keep it simple we’ll assume that no matter how many shares you own, each company’s dividend totals $1). That’s another $10. Is that income, or principal?

It’s income. You can spend that, and still maintain your principal.

Now that we have defined income and principal, let’s delve into where that $1 comes from.

Every public company has a board of directors, and it’s up to that board to decide upon and declare a dividend on the company’s stock. So at a director’s meeting, someone will present the company’s financials, talking about how well operations are going. If things are going particularly well the board may decide it’s time to raise the company’s dividend. So instead of $1, the board may decide to pay $1.10.

Where does the dividend come from? It comes from the company’s cash flow, which it generates from selling goods or services. NOTE! that the payment of the dividend has nothing to do with the company’s SHARE price, only whether its profits are enough to pay the cash out to shareholders. So even if the company’s stock sinks in value, the $1.10 payment will still be made.

Now if a very bad recession hits, dividends may be reduced or eliminated. Sometimes a company runs into trouble even without a recession, and has to decrease its dividend. But for the most part, once the Board declares a dividend at a certain level, it is loathe to decrease it. So most of the time, there’s margin of safety around the dividend, assuring that the company can pay it even if times get lean.

So what does this mean for your portfolio? Well, your $110,000, which is generating $10 in income, could sink to $80,000, but it would still generate $10 in income, provided you own high quality companies. And you can see that growth can come from two places in your portfolio – principal, when stocks go up; and income, when the board of directors increases dividends. That’s why stocks pack such a powerful punch over the long term, despite being occasionally vexing over the short term.

Giving To Charity on the Cheap

Ever wonder how you can make a difference even if you don’t have a lot of extra cash? Here are a few ways we give to charity that don’t require a fat checkbook:

Kiva. Cascade Investment Advisors keeps funds on deposit with Kiva perpetually. We originally sent Kiva $1000, and that was spread among lots of loans. A loan can be made for as little as $25. Most of the loans benefit enterprising folks in South America, Europe, and the Middle East, but Kiva also has a new division making loans in the US. Recipients tend to be very good at repayment, and just a little goes a very long ways when you’re talking about Ecuador or Guatemala. Check it out here: https://www.kiva.org/

4Ocean. One of my pet peeves is trash in the oceans, which is reaching outrageous proportions and killing sea life. 4Ocean was started by two guys who went to Bali to surf and saw fishermen coming back with no fish, but lots of plastic, which they then tossed back into the sea. These two started a company that employs fishermen and others to extract the plastic, recycle it, and/or dispose of it responsibly. The results have been impressive. 4Ocean is not a nonprofit, but for as little as $20 you can do your part: https://4ocean.com/

FreeKibble.com. If you love animals, this one is brilliant. FreeKibble was started by a grade schooler in Bend, Oregon several years ago. The idea is to answer a couple of trivia questions – one about dogs and one about cats – and whether you are right or not, FreeKibble.com donates kibble meals to shelter pets. A tie-up with Halo pet food assures the donations, and you can play every day. This one entails absolutely no money out of your pocket! Here is the website: https://www.freekibble.com/

Happy Giving!

What Slowdown?

While tariffs and threats about tariffs are being blamed for a slowdown in manufacturing indexes, job and earnings growth, lagging auto and home sales etc etc, it is entirely possible that weather is the real culprit. Stocks have swooned off highs and the bond market is acting like the next recession is upon us, but a consistent factor mentioned in earnings conference calls lately is weather. Some companies are referring to the fact that their deliveries through and to the midwestern US were severely hampered in the last few months, depressing earnings. In our office, we waited an extra month for delivery of two replacement windows this spring. Andersen Windows is not alone.

The media have carried stories about towns along rivers having no access to the other side of the river without engaging in a 2 1/2 hour drive to a higher bridge, and other towns completely losing their tourist populations this spring. Likewise, farmers are underwater, literally.

It is possible that the slowdown that we see now will be repaired as the year moves forward. Should that be the case, look out for a foray upwards in yield on bonds, and possibly, a re-establishment of the bull market in stocks.

Why Did the Market Do That?

The media loves to ascribe a reason for every significant stock market move. Humans feel better if there is an answer to ‘why?’ How many times have you read something like, “Stocks fall on worries over trade”, or “Stocks down on concern about inflation”? The reality is, no one really knows why the market moves one way or another from day to day. Stock investors tend to be forward-looking; consequently, prices are not necessarily responding to today’s news. Or, if today’s news is affecting prices, it’s often something completely unrelated to splashy headlines.

We have made the point a number of times that interest rates impact stock prices. Another important factor is earnings from bellwether stocks such as Amazon, Apple, or Boeing. Sometimes this type of news is buried in the back pages of the paper.

So when you hear the nightly business news, ascribing today’s market move to a tweet, spend a little time looking at earnings reports or Fed announcements, and you might find the real reason the market moved.

Will We Ever Build Housing Like We Used To?

The US has been building far fewer single family homes in this economic cycle than we did from the 1960s to the early 2000s. Part of this is blamed on the Great Recession and its impact on millennial buyers. But there are signs that this is about to change.

Recently, Brookings published a study – one they routinely update – on where millennials are moving (see here https://www.brookings.edu/research/how-migration-of-millennials-and-seniors-has-shifted-since-the-great-recession/ ). Migration patterns show some surprising statistics. Both California and New York are experiencing net out-migration; Illinois, New Jersey and Massachusetts are on that list too. Inside the numbers, Sacramento and San Francisco are still drawing the young educated crowd, but overall numbers are down for the Golden State. Portland is a big draw, ranking number seven on the city list. But Minneapolis, Kansas City, and Columbus OH rank 14th, 20th and 12th on the list so it’s not all about coastal cities.

The big winner by a long shot is Texas, with millennials moving to Austin, Houston and Dallas in droves. Houston ranks first in the city list, and Texas ranks number one in the state list with Washington (Seattle) a very distant second. Too, the top winners this time around are nearly the same as just after the Great Recession, but their gains are accelerating.

A common theme among many, though not all, of the destinations for young people is cheap housing. Millennials have been slow to marry, and slow to have children, but that’s starting to change. At the same time, this cohort – one of the largest population bulges the US has ever seen – has a lot of student debt and a lasting impression of what can happen when housing goes bad. If you’re young, just married and not terribly wealthy, what do you do if you want a house? The answer lies in where millennials are moving – and we think it indicates that housing is about to gear upward on a long term basis. Beneficiaries of this move might be housing stocks, but looking at housing related bonds, wood and other building products, and furnishings might be a worthwhile exercise in the next couple of years.