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In Defense Of Special And Variable Dividends

May 03, 2018 10:18 AM ETBF.B, BF.A62 Comments


  • Many investors won't touch stocks that don't pay regular same-sized dividends on a monthly or quarterly basis.
  • You're missing out on a bunch of good companies that don't follow the standard American practice.
  • For one example, consider Brown-Forman and its much higher than stated yield.

One of the bigger differences I've seen between US-based and non-US investors is their feelings toward dividends. American investors have a heavy preference toward companies that pay a regular at least quarterly dividend, and always maintain or increase that level of payment. Foreign investors are much more forgiving toward less-than-quarterly dividend payments and variable payout levels.

Having been raised in the US and accustomed to its model, there's something nice indeed about steady-to-rising dividend payments that arrive frequently. I certainly understand the comfort and familiarity that comes with this approach. But let's play devil's advocate for a minute. The more I invest in foreign companies, the more respect I've built for the other model - even if it's not my personal preference.

For the sake of not getting too far into the weeds, I'll stick to a US company, Brown-Forman (BF.B) (BF.A) that uses a less traditional dividend payout model. Brown-Forman, for those unfamiliar, is the maker of Jack Daniels and other leading liquor brands. It is also a classic Dividend Aristocrat. It's now racked up 32 years of consecutive dividend increases. That comes with an asterisk though.

Hidden Yield

I've written several articles over the years here on Seeking Alpha about Brown-Forman, in fact, I was pounding the table on it when it was in the high-30s (split-adjusted) in 2016. One of the most common points of contention in the comments sections on Brown-Forman articles was that the dividend yield was simply too low.

At the time, it was yielding 1.5%, which was its highest yield dating back to 2012. Brown-Forman is never a high-yielder in part because the stock usually trades at a high PE (low earnings yield) and management doesn't elect to run a high dividend payout ratio. Combine the two, and the stated dividend yield is never going to be all that high.

This article was written by

Ian Bezek profile picture

Ian worked for Kerrisdale, a New York activist hedge fund, for three years, before moving to Latin America to pursue entrepreneurial opportunities there. His Ian's Insider Corner service provides live chat, model portfolios, full access and updates to his "IMF" portfolio, along with a weekly newsletter which expands on these topics.

Analyst’s Disclosure: I am/we are long BF.B. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (62)

Timely article with PACs recent filing. Am curious on your understanding of the 'capital stock reduction' / dividend.
Ian Bezek profile picture
Right, they generally pay out one of these every year. As per their concession agreement with the Mexican government, they have to keep a set amount of capital on hand as part of their duty in being a responsible operator. PAC pays a normal regular semi-annual dividend of a smaller quantity. In good years (such as what we've had lately) they end up with excess capital well above the regulatory threshold, and thus can return more to shareholders.
Messed up with my reply but thanks for the context - the wording of the filing made it a bit confusing for me. Still am surprised with the stocks reaction to it. Do you think the decline has anything to do with that or just falling off with EWW? Always am a bit inclined to buy more of PAC under $100
Ian Bezek profile picture
Just Mexico going down (it's down 5% over the past month). The special dividend is expected and has happened several years in a row now.
Ex-Bingo Addict profile picture
Ian, great article. Investors should get out of their boxes more often. Nestle (NSRGY) is often overlooked. Due to it making just one dividend payment annually. Same for European companies like Diageo (DEO). Where the norm is paying only twice a year. One way to view such companies is more akin to private business holding. Many closely held or family business only make one distribution a year.

As for low yield and high yield investments. My personal preference is building up a solid base of income producers. Those higher yielders provide the cash flow to buy lower yielding stocks then. Taking UL dividends to buy BF-A or BF-B is a thing of beauty.

Long all mentioned stocks.
Gold Finder profile picture
I actually understand why some investors do not like irregular dividends. But also being against annual or bi annual dividends? Who cares!

Siemens gives me an entire dividend in january. Covestro and Henkel and Merck came in spring. Then the annual dividend of BASF and Bayer will come around this summer period.

Even if you do not want to wait an entire year for your dividend, you actually do not if you own enough holdings.

It also costs money for a company to sent dividends. What a waste of operating expenses to send a dividend every month. Much more cost efficient to do it once per year. Remember- stocks are not saleries..

Rationalize it even further, would you want your salery on a monthly basis, or would you take the opportunity to receive your entire annual salery in one go?
darnoc111 profile picture
Gold -- "would you want your salary on a monthly basis, or would you take the opportunity to receive your entire annual salary in one go?"
When you get into your 60's and older waiting a year for your payout is like an eternity. Also if a company only pays once a year and if they are not an established dividend achiever then your risk of getting anything becomes a lot larger. It may cost the company some money to pay out the dividend, but it forces them to be disciplined and work harder for their shareholders. And the alternative to your question would be is how many people have the financial discipline to be able to wait a year for their salary to be paid?
On the other side of this debate I brought up my wife's and my portfolio's and compared their performance. My wife is very conservative and only invests in very low risk investments, while I like high yield investments. Her portfolio grew at average 3.5% since 1996, while mine grew at over 7% despite having gone through 3 collapses and as of yet not recovering fully from the last one. Now I am not as good as some investors are but I think that a more agile investor could have done even better.
Now I think that a few irregular dividend payers would be fine, just don't make them the entire portfolio.
Robert Allan Schwartz profile picture
"Investors should get out of their boxes more often."

I don't see investors as being in a "box".
I do see investors as purchasing whatever companies will help them achieve their personal investing goals.

This might be slightly off topic but I read that the Bank of South Carolina, another company that Ian likes, recently paid out a special dividend of 10% (I hope I have my facts right). That would be a huge bonus to a shareholder.
Ian Bezek profile picture
Here you go...

In addition, at its March 22, 2018 meeting, the Board of Directors of Bank of South Carolina Corporation approved a 10% stock dividend payable May 31, 2018 to shareholders of record as of April 30, 2018.
darnoc111 profile picture
Ian I think that buying variable rate dividend companies is fine for a young person who is growing their portfolio since instead of dividends you will have capital gains when and if you sell, especially with yields so low. But when you need income over capital gains a steady and growing dividend is better. Many older investors look to high yield stocks to supplement their income in retirement. The biggest problem to high yield stocks is their chances of blowing up. I don't have the skills in investing like you do,and have experienced my portfolio blowing up when I either did not understand the risk or the incite to see a problem. But after many years of investing in mainly high yield stocks the income from dividends far exceeds anything that I could have achieved by just putting money in the bank. It would be interesting if you could present an alternative investment thesis by looking for high yield stocks for the retired person looking for income.
Ian Bezek profile picture
That would be a different article on high-yields, and frankly, a lot of SA authors have probably covered it as well as I could.

The point I wanted to make here is people shouldn't dismiss a company like BF with an irregular dividend policy simply because "the yield is too low".
darnoc111 profile picture
I understand about irregular dividends, I bought into one, UAN and took my loss on it luckily before it sank as far as it now has. I would guess that you are kept very busy with your Ian's million portfolio and personal investments, but still would be nice to read your thoughts on good high yield stocks. As for other authors, I read them too but find you more perceptive than most. Like your auto parts stock you bought at 500 that went to over 700 fairly quickly. Anyway hope you give a high yield stocks portfolio some thought, all the best. Darnoc
Ian Bezek profile picture
Thanks for the perspective, and I'll see what I can do.
Matt Sabre profile picture
DIS perhaps another unusual example with their dividend only twice a year instead of quarterly.
gldhwk profile picture
Brown Forman B stock is now selling at a 4 pct premium to the A stock. So sell your recently distributed B shares and buy 4 percent more A shares. You get an immediate 4 pct dividend increase. The dividend is the same on both issues and the only Difference being the A shares can vote. In time it is a fair bet that the the A shares will resume their historical premium to the B shares and you can sell your A shares and buy, say 6 percent more B shares. Over time this switching from A to B and then B to A can have a nice increase in income in addition to the annual November dividend increase. Plus, they may pay a special dividend when the new acquired brands from the UK and Scotland mature.

Just saying.
Ian Bezek profile picture
Correct, I own both classes, but more of the As than the Bs due to a similar thought process.
@gldhwk Sure, I sold B shares after the special and regular dividends hit the account. I don’t game the price spread even though it’s advantageous as of this writing. I simply want the voting shares because a) I don’t care about liquidity and 2) don’t want voting shares floating around aimlessly (e.g. with shareholders that have a short term view). I’ll always vote my shares with the family if barbarians are at the gate.
Interesting article Ian, thank you,

I find it rather amazing but there are people that won't even look at a stock like $UL because it has a fluctuating dividend. It's not that Unilever hasn't been raising the dividend every year, at least since I've owned it, but the payout for the ADR changes based on exchange rates and that will cause people to dismiss it and never look deeper.

I see no problem with a company that will change there dividend based on economic conditions although I would prefer special dividends whenever they accrue the xtra cash.
Ian Bezek profile picture
Another good example - I also own that one.
Robert Allan Schwartz profile picture
Todumb2learn, the reason I don't look at companies that pay fluctuating dividends is that I am retired so I need to be able to predict my income so that I can pay for my expenses.

Yes, a company like UL might be raising its dividend every year in its home currency, but after currency exchange rates, US investors would see a fluctuating dividend.
Good point but missing cap gains rise.

I too prefer regular predictable dividends
but also have growth stocks which often
grow faster than a dividend stock. When
it rises, will sell partial and put that money
into dividend payers.

Shake it up !
greg.investing.is.hard. profile picture
if a variable div co pays out less for a few quarters, that may leave many unhappy enough to sell. this phenomenon, if it happens, may be a good timing indicator- to buy.
SDS (Seductive Dividend Stocks) profile picture
I believe that combination of regular and special dividends is much more better model aligned with long-term investors that regular dividends and buybacks alligned often only with top company management compensations.

Brown-Forman cannot increase significantly production of their top spirits without quality destruction even if demand grows 100x. On another hand they cannot increase prices more than something like ~ 3x at this 100x demand. So I think that their P/E is unrealistic probably because their products are too popular on Wall Street.

"If you're owning as a long-term investor, it hardly matters if the dividend comes in a lump sum or spread out slowly on a quarterly basis, however. "
Disagree. Let say you plan to keep stock for 10 years (ASSUMING THAT COMPANY BEHIND IT IS REALLY GOOD) but not DRIP. What do you prefer: to receive equal dividends each year or to receive 10x of annual dividends in year1 and nothing in other 9 years. You can invest these 10x dividends in another stock and have better "time IN market" profile. I'd prefer 10x case with obligation to keep stock for 10 years .

Anyway, thank you for good paper. Brown-Forman sits on my watch list from 2007 and I always thought that yield is too low but didn't think about their specials. Does BoD have commitment to pay special dividends in future?

Robert Allan Schwartz profile picture
Ian, my "problem" with special dividends is that they are unpredictable, unreliable, and undependable, three qualities which a person living off their dividends would not like.


Gold Finder profile picture
There is always the fundamental problem of if you should live of dividends. Even "stable" ones are not quaranteed.

Deposits are quaranteed, goverment bonds are.
Robert Allan Schwartz profile picture
"There is always the fundamental problem of if you should live of dividends. Even "stable" ones are not quaranteed."

There are no guarantees in investing.

"Deposits are quaranteed, goverment bonds are."

Perhaps the face value is "guaranteed", but as with bonds that pay fixed income, you need rising income to avoid the erosion of purchasing power caused by inflation.
Gold Finder profile picture
Yes, and therfore you cannot have both. Or you have a quarantee or you dont.

I mean, there are plently of lucky people here we hold stocks and see the dividend rising every year. There were also people who held stocks that cut the dividend. Actually, the dividend aristocrate list is always changing. Names leave and come...

If you had your dividends from GE, COP and Kinder, you would not be saying here that special dividend are "unpredictable, unreliable, and undependable". That should include a lot more kinds of dividends.

Just my point of view.
Panzerman profile picture
IAN..... people are fixed in their ways and attitudes. It has to click their boxes in the correct order that they have in their minds. Most US stocks pay quarterly and that is the way it must be. Great stocks out there that are variable or only pay once a year, and this turns them away, and since it is likely to be foreign they are even more afraid. Oft times the same people who have never left the USA for a vacation because they are afraid. Hate to sound negative but that is the way it is.
CapturandoDividendos profile picture
I can sleep well at night with Brown Forman. Love it!
Illuminati Investments profile picture
Any other companies you’d recommend that employ this tactic?

I can think of COST and F, but would be interested to know of other good “foreign firms with variable dividends”.
Ian Bezek profile picture
Much of Europe and Latin America for starters. Look around in the IMF, there's a bunch.
@I.I., thought I might offer up a couple as well. I hold SWMA and INVE.A (Swedish Match and Investor A.B., respectively, both of which trade in Swedish Krona on the SEK and employ this strategy). I’ve never been unhappy with either of those two or Brown-Forman. I hope I’ll be fortunate enough to pass BF.A shares down to generations to come.
Retirees count on regular dividends and that's a fact.

Younger ones should go for growth and the dividends
would be a bonus.
Thanks Ian.
Favorite sentence: "
In lean times, they have no pressure to freeze or cut the dividend, since it represents such a small portion of earnings. In good times, they can spit out more special dividends."

Same applies to my other holding - Ford. People cry about not growing div, but I believe companies are better off with smaller divs and special divs if times are good.
berloe profile picture
Don't count on special dividends to buy groceries.
Ian Bezek profile picture
Alternatively, fund your groceries and other regular overhead out of quarterly dividends, and enjoy the special dividends for overseas trips and other such luxuries.
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