I remember the old story of a farmer who said to his wife, “I told you ‘I love you’ when we got married, and if anything changes I’ll let you know.” Most of us need feedback a little more than once in a lifetime. The same goes for my dividend investments.
In the United States and Canada, most companies pay dividends on a quarterly basis. In other parts of the world, it’s not uncommon for companies to pay an annual or semi-annual dividend. That’s not to say that North American companies sometimes don’t pay quarterly dividends. For many years McDonald’s (MCD) and Walt Disney Co. (DIS) an annual dividend is distributed. MCD now pays quarterly while DIS pays to Ruby Tuesday, Inc. (RT) pay a semi-annual dividend. Some companies and CEFs / ETFs that pay monthly dividends go the other way. These include Realty Income Corp (Ö) and Eaton Vance Tax-Advantaged Global Dividend Fund (ETO).
Some predicted more companies would move on to annual dividends, but there hasn’t been much movement in that direction. As mentioned above, MCD again paid quarterly dividends, while DIS paid out semi-annual dividends. Around the year 2000 several other companies such as AT&T (T), Wal-Mart Stores Inc. (WMT), Coca Cola Co. (KO), 3M (MMM) and home depot (HD) considered switching to annual dividends, but ultimately rejected the change. So why should a company risk pissing off its shareholders and moving on to an annual dividend?
Reasons for an annual dividend
- Save administrative costs: Many companies popular with children, such as McDonald’s and Disney, have large numbers of shareholders who hold small numbers of shares. It cost four times as much to mail four dividend checks for $ 0.50 instead of one check for $ 2.00.
- Generate additional income: Funds used to pay dividends at the end of the year can be invested (or to pay off debt) and generate a return throughout the year. This decreases when dividends are paid out more frequently.
Reasons against an annual dividend
- Shareholders expect quarterly dividends: Some shareholders in dividend companies use the dividends to make a living. For some, it would be difficult to get a single annual distribution and spread it over the coming year. In addition, the transition would prove financially problematic for those with insufficient resources.
- Dividends often ensure the health of the company: In November 2007, if the dividend is held constant, it will be an indication to the market of the extent to which the company is struggling. Since cash cannot be forged, dividends are a strong scorecard in assessing the company’s financial health. If you had a treatable disease, would you rather know in 3 months or 12 months?
For me, quarterly dividends are the perfect balance between too much administrative work (for me and the company) associated with monthly dividends and insufficient financial feedback from the company associated with annual dividends. How do you feel about annual dividends?
Full disclosure: Lange MCD, O, ETO, WMT, KO, MMM,
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