When A Dividend Increase Isn’t
While there were a couple of companies that announced initial dividends today, Georgia Gulf (ticker: GGC) and Pacific Coast Oil Trust (ticker: ROYT), there were no companies announcing dividend increases today.
Normally on days when there are companies announcing a dividend increase I take a few minutes to look over each company to see if it might be worthy of further research for inclusion in the Daily Dividend Investor Portfolio. However, since there was little to research today, I took a few minutes to look back over some of the more recent increases of the last week or so.
While going through the list, I realized that quite often, we see Royalty Trust shares end up in the list of dividend increases. Some of the more common names are Sabine Royalty (ticker: SBR), Cross Timber Royalty (ticker: CRT), Permian Basin Royalty Trust and Mesa Royalty Trust (ticker: MTR).
These are typically aren’t companies per se, but rather they are holding entities that pay a royalty based on the sales of natural gas or oil from producing wells throughout the United States. Because the production from the wells varies dramatically each month as well as the sales price of the commodity(either oil or gas), the amount of income generated can fluctuate substantially each month. We might see Permian Basin (ticker: PBT) listed as a dividend increaser this month (as we did yesterday) and next month it could be listed with a reduced dividend – Mesa Royalty Trust (ticker: MTR) reported a decrease in it’s payment today.
When searching for companies and holdings to add to the Daily Dividend Investor portfolio, one of the more important factors is the stability of the existing dividend and ideally we would like to see a longer term history of continuous dividend increases. The royalty trust shares just don’t meet that criteria. Now as you probably know, the DDI portfolio does hold a number of shares of Royalty Trusts, mainly because they pay monthly with above average yields.
Time for a Change
Moving forward, I’m going to be making a few changes, both to the blog as well as the DDI portfolio itself. As for the daily dividend increase updates, I’ll continue to list Royalty Trust shares when they show a month over month increase – but I’ll also be noting the shares as those of a Royalty Trust with the disclaimer that a near-term reduction in the payout is likely.
With regards to the DDI portfolio, because preparing end of year tax returns for Royalty Trust holdings is a little more complicated than reporting regular dividends and requires the filing of a Schedule E form, I’m going to be eliminating my Royalty Trust holdings before the end of the 2012 calendar year. It’s my hope that I can reduce some of the complexity of my annual tax filing, even though I’ll be giving up some of the better income generating holdings.
Now that the DDI portfolio is diversified across over 100 separate holdings, removing the Royalty Trust shares should not have a large impact on the overall performance.
I still believe that Royalty Trust shares can provide and excellent source of monthly income and you may want to consider holding or adding to any positions you may already have.
Have an idea? A comment, concern or suggestion? Drop me a line!
You can reach me at: [email protected]
As always when evaluating investment opportunities it’s important to keep in mind not only the fundamentals of the stock itself, but also how the holding entity (Limited Partnership,Royalty Trust, Master Limited Partnership, Business Development Company, Preferred Stock) may affect the way you report income on your annual tax return as well as the amount or percentage of tax you will be required to pay. Adding shares of any of these special entities to tax deferred / retirement accounts may also present additional issues.
Remember to review all of the fundamentals of any company BEFORE investing – do not simply buy a stock based on the dividend payout. If you have further questions about any stock mentioned her you should first consult with your CPA or tax planner / adviser before making any investments.