In my day job, i deal regularly with investments and wanted to point out a weakness with the published yield of many stocks. (MLP's and royalty trusts are not covered here, because they have their own issues). SA authors should really be proactive and mentioning in their yield articles whether a yield is a dividend or a distribution from an MLP, as they are treated very differently.
A recent article touted the dividend yield of Targa Resources, which is listed at 7.7%. When buying this in a taxable account, however, this is not the actual yield, as Targa is making payments in excess of their earnings and profits.
Targa has 2 pages on their investor relations page to focus on.
1st one is the dividend page, which is here:
That shows that hefty dividend, which is what investors and most stock screeners use to compute the yield.
However, there is a second page that investors should focus on.
it is called "tax matters" and can be found here:
For 2017, they note on the top of the page that 100% of their 2017 dividend was return of capital. So for anyone who bought it in 2016/2017, the actual dividend yield on their investment?
Zero, since all the payments reduced the cost basis, so it is your own money coming back to you.
All the "dividend" did was reduce the cost basis in the shares, thereby changing the amount of gain/loss that will be recognized when the shares are sold in the future.
Not to pick on Targa, but there are generally 3 types of securities where this is relatively common and somewhat predictable.
(I am leaving out funds and ETF's, as those are not predictable)
1. Newly issued securities that don't have much of an operating history, so their first few dividends has a high likelihood of being return of capital.
2. REIT's which can't save up retained earnings, so they can be very unpredictable in their yields and could shift from earnings to return of capital because of natural disasters, a problem with one of their properties, etc.
3. And the last category were limited partnerships that have elected corporate taxation, like Targa Resources. It is a combination of the business model and the corporate election that causes the overstatement of yield.
Others in this group are:
Gaslog (Symbol GLOP)
Plains (Symbol PAGP), the other Plains is an MLP.
Tallgrass (symbol TEGP), the other Tallgrass is an MLP.
(click on the PDF icon to see what the dividend is actually composed of)
To a certain extent, successful companies will pay less and less return of capital as they have earnings, so a company that has 100% return of capital one year will have less than 100% the following year, until the dividends become 100% dividends. A recent example of that is Medtronic, who switched over in mid-2016 and explains that on its investor relations page.
There are a few other companies that have unpredictable taxable income, or no retained earnings, the most widely held is Qualcomm, who have an entire investor relations page devoted to it.
Eaton is another one that the dividend "yield" is illusory as it is 100% return of capital.
So fellow investors, when investing in a stock with a juicy yield, that yield may not be what it appears to be, either because it is not a "dividend" and is actually a dreaded MLP distribution), or because it is not a dividend because the company has no earnings.
So spend a few minutes doing due diligence with the company and determine
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.