The Peril and Promise of Dividend Investing In a coronavirus World

I was appointed the finance correspondent for Senior Life Advisor, an online magazine for investors near or in retirement.  The articles for Senior Life Advisor were designed to offer actionable information as well as items of interest about economics, investing and personal finance.

With blood in the streets, there’s still a silver lining in this dark cloud . . . maybe.  Specifically, if you are a dividend investor, these times offer promising opportunities.    

To wit, when stock prices go down, dividend yields up.  Here’s a for instance.  When Apple was at its peak of $327 not too long ago, the $3 dividend the company paid in 2019 represented a yield of 0.91%. Now with the price of stock at about $263, the yield is 1.15%, an improvement of more than 16%.  

But if Apple’s fortunes wane, what happens to the dividend?  

That’s where a strong balance sheet comes in.  As of the end of 2019, Apple had $206 billion in cash on its balance sheet.  So even if net income goes to zero, Apple could pay its dividend — which at $3.28 per share represents a total dividend expense of $13.8 billion — for  nearly 15 years.  

Over at cigarette market Altria, which owns famous brands such as Marlboro, it’s a different story.  When Altria’s share price was at its peak over the last year at $57.88, the dividend of $3.28 represented a yield of 5.67%.  With Altria stock way off in the market downdraft to about $36.00, the yield is 9.17%, an improvement of 61%.  

That might seem like a good deal, but Altria’s balance sheet is much weaker.  With just $2 billion in cash on its balance sheet, and an annual dividend expense of about $6 billion, Altria has only a third of the cash it needs to pay its dividend.  Based on the numbers alone, Altria should cut its dividend very shortly.  

It’s not quite that dire though.  Making adjustments for so called non cash items on its income statement, such as depreciation, which get expensed but doesn’t really eat any cash, and similar adjustments, Altria generated more cash than shows up on its balance sheet.

Still on the numbers alone, which dividend is safer:  The one backed by 15 years of cash, or the one backed by less than one?   With stocks off across the board, there’s some tremendous opportunities to lock in high yields, but getting them requires not just guts, but conviction.  

Two quick notes:  1) If you try this at home, you may not get the exact same numbers we present here because companies have different ways of counting the number of shares outstanding and because some analysts look at historical dividends while others look at projected dividends.  2)  The yield on Apple, at 1.15% seems puny, but remember with dividend investing, it’s not where you start but where you finish.  As the cash paid out over time increases, the yield on the cash you initially invested rises, sometimes dramatically.  

Sources: 

Apple 10-K

https://s2.q4cdn.com/470004039/files/doc_financials/2019/ar/_10-K-2019-(As-Filed).pdf

Altria 10-K

https://www.sec.gov/ix?doc=/Archives/edgar/data/764180/000076418020000018/a2019form10-kq4.htm#sF9A912B4E1B75AD2A70881129D419112