Okay… so the income investor has employed his or her method of selecting income-producing stocks/funds as preparations are made for the employment paychecks to stop and to be replaced by some combination of a pension, Social Security and these dividends (used here generically to represent all income security distributions). One of the yet unanswered questions will likely be…"How should I account for these dividends?" Should the income investor just assume dividends will arrive and not bother tracking them? Do the dividends need to be accounted for? Tracked? Periodically analyzed? Not all will necessarily agree, but I think most income investors would answer with an emphatic yes, yes and yes! So what kind of tracking method should be used? Well, there are no standards here, no templates that I've ever seen and no guidelines I'm aware of. It's simply up to the retiree to make up their own, so I suspect there are as many different methods of dividend accounting/tracking/periodic analysis as there are income investors. What follows is the system I've developed over the years that others may find useful in developing or tweaking their own methods.
The first step in building such a system is to determine what it is, exactly, this system should be doing. Carefully thinking through this is vital. There are hundreds of stock statistics that will tempt the income investor to include on their tracking sheet, 99% of which have no direct relationship to the dividend. I've seen dividend tracking worksheets that contain RSS feeds on up-to-the minute pricing, analysts buy/sell recommendations, 52 week highs, measures of market risk and on and on and on. I am a firm believer in keeping it as simple as is necessary to provide the actionable data I need to stay on top of the dividend health of our income portfolio. So here is an ordered list of the important dividend accounting objectives that I've come up with:
- Ensure the dividend that is expected, actually arrives when expected
- Ensure the amount of the dividend is what I've projected it to be
- Existence of a "special" dividend
- Portfolio income growth rate for the year
- Monitor income portfolio diversification
- For taxable accounts, collecting sufficient income information to be able to project quarterly estimated tax payment
- Changes in cash flow fundamentals
- Individual security dividend history and dividend growth rate over holding period
- Historic data: purchase date, basis and any stock splits
- Redemptions (preferred stock) and stock spin-/split-offs
Objectives 1-6 I collect on a single Excel Worksheet (below). Objectives 7-10 I collect on individual Worksheets for each stock (below).
The following may be "nice to know," but are not relevant to my analysis of whether I should keep, add to or eject any individual income security from the portfolio
- Any measure of total return
- Any measure involving the company's earnings: historic or projected
- Credit rating, other than for bond holdings
- Any measure of price (one exception to this I discuss later)
- Yield on cost
Here is a close approximation of my current income portfolio that captures the first 6 dividend accounting objectives:
At the beginning of each year, I bring up the previous year's sheet and then save it under a new name for the current year (e.g., "Dividend collection 2014" to "Dividend collection 2015"). I then enter the last dividend of the previous year as the beginning dividend of the current year and copy/paste this over that income securities projected dividends for the year (as shown in the table above). I then color code all unreceived dividends RED. During the first week of each month I go to the previous months activities on my brokerage web site and update the value of each security dividend paid that month (if required) and change the actual dividend paid from red to blue. This allows me to quickly scan down the list of dividends to ensure all are accounted for for that previous month.
To the right of the "Income Group" column is a column with a number. This represents the day of the month I expect the dividend to be paid. With some stocks, this can vary by a few days. Some quarterly dividends beginning in January will be paid on the 15th while all other quarterly payments (Apr, Jul, Oct) will come in on the first of the month. The few times I've run into payment-date inconsistencies, I will go to the NASDAQ web site, enter the symbol and then go down and click on "Dividends," which will show me a table of all the relevant dividend date data and the actual dividend paid or that will be paid after its announcement.
As dividends are received and the sheet updated, if the dividend increases and I expect that dividend to continue for the rest of the year at this level, I will copy/paste this new dividend to the remaining quarterly expectation. This will upgrade my income projection for the year and assist in quarterly estimated tax payments. If the dividend varies, as is the case with a fund or a European bi-annual dividend stock, such as Vodafone (NASDAQ:VOD) or iShares Global Utilities ETF (NYSEARCA:JXI), I will usually just leave the last year's numbers in place as this year's projection.
To the right of the monthly dividends collected is a column totaling that security's dividends collected for the year, and for those holding dividend stocks in a taxable account, to the right of this is my expectation of how the dividend will be characterized for tax purposes: ordinary income (REITs common and preferred, bond interest, BDCs), qualified dividend (C-Corporations or LLCs) or not taxed (muni bond interest, Return of Capital (NYSE:ROC) or a Royalty). This is not entirely accurate, as REIT distributions are rarely 100% ordinary income, and may have capital gains (including Unrecaptured Sec. 1250 gain), some qualified dividend and ROC. But treating REIT distributions as all ordinary income does provide a conservative estimate for tax purposes. Using something like TaxCaster and these projected values (plus any other household income) will give a pretty good base for quarterly estimated tax payments (for those who do quarterly payments)
The bottom of the sheet shows the total $$ value of the monthly dividends collected, the previous year's total dividends collected for each month (a copy/paste from last year's sheet), the % change for each month and then the "bottom line" % growth (decline) of portfolio income. At the start of the year, the increase % is the "base" increase based on the end of the previous year's dividend and does not yet take into account any dividend growth (decline) that will happen during the upcoming year... in this case for 2015. So this will not be accurate until all dividends are recorded for the year... but it is indeed nice to start a year with a base increase over the previous year!
Dividend diversification may have various definitions, but mine is limiting portfolio income to not more than 3% per security, 10% per income group and 20% per ETF/CEF (note: I have set no limit for preferred stock as an income group). When initially set up, all individual income securities were below these limits. But over time, a faster growing dividend group or even a single security could run up over my self-imposed limits, as can be seen in the above sheet where REITs are a bit high and a couple of stocks, Kimberly-Clark (NYSE:KMB) and Philip Morris (NYSE:PM), are at their maximum. If these, or other stocks or income groups exceed my self-imposed limits, I may sell off part of that holding and redeploy the cash to another income stock. This is the income investing version of "rebalancing."
I do not capture any information relating to the price of a security, other than the acquisition basis in taxable accounts. The simple reason for this is I've not been able to find any cause-effect relationship between price and dividends paid. However, if a company's price increases proportionally much faster than its dividend... that is, the yield is declining... this may be an indicator that the market is reclassifying this income stock from an income and growth stock to a growth and income or even to a pure growth stock. This MAY mean I could add income to our income portfolio without taking additional income risk by selling the highly appreciated/low yield stock and replace it with a higher yielding stock of an income risk equivalent to the replaced stock. Of course, the constraint here may be capital gains, the tax cost of which may make this economically unfeasible. I have no way of monitoring for this, other than hearing of it in a discussion forum... although in my experience, it is relatively rare.
Dividend accounting objectives 7-10 above require a separate sheet:
For the sake of brevity, I've hidden the middle part of this sheet, as it is long. This historic data is for a single income stock, Exxon Mobil (NYSE:XOM), my first income stock purchased in 1997, even though back then I had no idea what I was doing... XOM just seemed like a "solid" company with good prospects for long dividend payments. Each stock will have its own worksheet, with its symbol on the worksheet tab at the bottom. This table takes more time to keep updated and so is a bit more work. Some might argue that basis information, for taxable accounts, is available at the brokerage and past dividend data is available on past form 1099s... and this would be true. But I find the trend in dividend growth history valuable in assessing dividend health. Now, one could simply insert another column in the dividend capture sheet that would show the dividend growth rate per year, getting the dividend/share data from someplace like the NASDAQ site mentioned above, and dispense with this dividend history sheet. But I also find the dividend objectives 9 and 10 very convenient to access when I need this information, rather than having to search through past transaction data. The other "feel good" data: YOC, cumulative dividends collected and long-term annual dividend increase (for XOM, going from 1997 $650/yr to paying over $2,200/yr today!) Ahhhhhhhhhhh yes! But to be sure, this is not a requirement of meeting my dividend capture/analysis objectives.
However, dividend collection objective 7, cash flow fundamentals, is a must-monitor set of metrics, as this is the early warning system that the dividend may be trending towards trouble. I keep this on the same historic data sheet, but am showing it separately here:
For a company as cash-flow healthy as XOM, even with the recent drop in oil prices, I will only update this once each year when the annual shareholder report is released, by adding to the existing dividend coverage table (above) the most recent 12 months of data from (usually) Morningstar. If a stock's dividend payout ratio or its interest expense as a % of Net OpCF have been steadily rising or ROIC numbers are steadily declining, I may update this table quarterly.
In conclusion, capturing and recording dividends and fundamental cash flow numbers is an integral part of pure income investing. Not only does it give retirees that good feeling of getting a paycheck without having to fight the morning commute, but it also monitors the actual dividend activity and tracks the ability of the dividend paying companies to continue their dividends. Your method of doing this will likely be different than mine… that is not important. But that the retiree does regularly collect and analyze actionable dividend data…. that is important.
As I have done in the past, anyone wishing a copy of these Excel sheets can PM me with your e-mail address and I will forward a copy to you.
Disclosure: The author is long XOM.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I do hold most of the securities listed in the income portfolio spreadsheet.