Frequently Asked Questions (FAQs)

Please note this FAQ page deals ONLY with High-Yield Investing questions.  If you have questions particular to one of our other investment newsletters, then we'd urge you to visit that newsletter's FAQ section or our General FAQ page.

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General Questions

Why should I focus on high-yielding income investments?

In today's fast-paced investing world, where everyone is looking to make a quick fortune on volatile stocks, it's easy to overlook the many advantages offered by income stocks. However, to do so would be a huge mistake. In fact, a look back at market data over the past 75 years shows that nearly half of the market's total returns have come in the form of dividends.

Between 1926 and 2003, dividends contributed 42% of the total return delivered by the S&P 500. It's been calculated that $1 invested in the S&P 500 in 1926 would be worth $2,260 today if reinvested dividends are included, but only $90 without the dividends!

If history is any guide, then dividend-paying stocks should also perform better than their non-paying peers over the long haul. This indeed has been the case. Studies have shown that dividend payers handily outperformed non-payers from 1970 to 2000. Their stock prices were also 10% less volatile, meaning they could be counted on to deliver steady returns throughout both good times and bad. What's more, according to the latest statistics from Standard & Poor's, dividend-payers are still outpacing non-payers in today’s volatile markets.

Editorial Questions

Can I email you with a specific investing or trading question?

Although we'd love to answer all of your personal investing questions, SEC regulations prohibit us from providing direct, personal investing advice. Nonetheless, rest assured that we will always give you sufficient guidance on all of our investing ideas in each of our High-Yield Investing newsletters. As always, however, please make sure to do your own due diligence on each company we mention to decide if it is right for your portfolio. You should use our newsletters for informational and entertainment purposes only. Any and all final investing decisions for your own account are entirely up to you.

Where can I find definitions to unfamiliar terms used in your newsletter?

If you're unfamiliar with any of the terms or analysis we use in our High-Yield Investing newsletter, then you will likely find a complete description of these terms in our financial dictionary. To view this full dictionary on our web site, please visit the following link: 
http://www.streetauthority.com/terms/glossary.asp

Could you explain the meaning of the "Ratings" column in your portfolio tables?

Our ratings are intended to give our current evaluation of an investment's future prospects for the next 12 months. The ratings are based on a forecast of an investment's total expected returns over the coming year relative to the S&P 500. (As you know, total returns include both share price appreciation and dividend income.)

Please keep in mind that our ratings are forward-looking measures. They are designed to give you a better idea of which securities are likely to deliver the strongest gains in the coming year. Meanwhile, while the return data that we list in the newsletter is a backward-looking measure.

For this reason, we may occasionally assign a "Market Perform" rating to a stock that has delivered outstanding returns in the past, yet a much stronger "Top Pick" rating to a stock with a lower yield and lower historical returns. The reason for this is simple -- although the first stock (our "Market Perform") may have delivered superior performance in the past, we now believe the latter stock (our "Top Pick") is likely to deliver better total returns in the coming year.

Here's a quick description of our ratings system:

Why don't you include recommended stop loss levels for your model portfolio picks?

Having said all of this, in select cases it might be wise for investors to use stop losses.  For example, if you're holding a stock with significant legal risk (perhaps a major lawsuit is currently pending), then you might want to set a stop loss to protect your portfolio against major downside loss in the event the company loses an important legal battle.

At the end of the day, please remember that all investing decisions for your own account are entirely up to you. Our newsletters should merely serve as a starting point for further research and due diligence on your end.

Is it possible for you to indicate when dividends are qualified for the reduced 15% tax rate? 

We generally try to highlight whether dividends for individual securities we feature in the newsletter qualify for the reduced 15% tax rate, are taxed as ordinary income, are treated as long-term or short-term capital gains or return of capital, are subject to unrelated business taxable income, or any combination of such tax treatments.

However, the tax treatment of any one security is often not a straightforward matter. There are often several components to a dividend payout, each taxed at a different rate. 

Another consideration is the unique investment situation of each individual investor. How long a security is held, where it's held -- a standard IRA, a Roth IRA, a taxable account, in a business or personal account, in a trust, etc. -- where the individual resides, and the individual's overall portfolio value all may affect the tax treatment of a distribution.

You can generally find information on the tax treatment of components of a company's dividend on the firm's web site. Sometimes, you may need to write or phone an investor relations contact listed on the web site for additional information.

For more specific information that applies to an individual's unique investment circumstances, you may wish to hire a personal accountant for more individualized assistance.

Why does the financial web site I'm using say some of the symbols listed in the newsletter are invalid?

For example, let's consider the case of Capstead Mortgage Corporation's preferred class B shares.

Popular web site Yahoo! Finance lists this symbol as: CMO-PB

Because this tends to be one of the most commonly-used sites by investors, we typically list the symbols offered by Yahoo Finance within our newsletters.

However, when using other web sites, such as online broker E*Trade, you'll need to enter in the symbol CMO.PR.B in order to get a price quote for this same security. If you visit E*Trade and try to enter in "CMO-PB", you'll get an error message that the symbol is not found.

Because the symbols listed often differ from web site to web site, the best way to look up current prices is to use each web site's "Symbol Lookup" feature to search for the appropriate symbol. 

When using the "Symbol Lookup" feature, all you need to do is enter in the company name into the search box. This will then give you a list of all securities that match, or are close to what you searched for.

Why do the yields listed in your newsletter sometimes differ from those found on financial web sites?

When payments vary greatly, the most reasonable calculation involves taking the last 12 months of dividend payouts (trailing twelve months, or ttm) and dividing that figure by the firm's current share price. This is called a trailing yield.

For example, let's assume Company XYZ's current share price is $50. Let's also assume the firm has made the following dividend payments over the past year:

March -- $0.50 per share
June -- $0.50 per share
September -- $0.50 per share
December -- $1.00 per share

As you can see, Company XYZ has paid $2.50 per share in total dividends over the past twelve months. So in this example, XYZ sports a trailing dividend yield of 5% (calculated by taking the $2.50 in actual trailing dividend payments and dividing that figure by a $50 share price).

But it's important to keep in mind that this represents just one way of calculating yields. Some financial web sites and other media sources report yields a bit differently -- instead of showing trailing yields, they list forward yields.

Unlike a trailing yield, a forward yield projects dividend payments over the next 12 months, and is best used when these payments can be predicted with reasonable accuracy. The forward yield takes the stock's latest declared dividend payment and annualizes it over the next 12 months.

Returning to our example, Company XYZ's most recent dividend payment was $1.00 per share. Assuming the firm's quarterly dividend payout remains at this new level, the firm will deliver total dividend payments of $4.00 per share in the coming year. Therefore, Company XYZ's forward yield is 8% (calculated by taking the $4.00 in projected future dividend payments and dividing that figure by a $50 share price).

This forward yield of 8% is very different from the trailing yield of 5% shown above.  Both are correct, but they are simply calculated in a different manner.

In our High-Yield Investing newsletter, we generally use trailing yields when possible, as they represent concrete dividend payments that a firm has already made. However, when a company has announced a regular dividend payout for the forthcoming 12 month period, we may use a forward yield to more accurately reflect what shareholders can expect to receive.

To make matters even more complex, what counts as a dividend payment may also vary. Some web sites include all components of the payment, including ordinary dividends, short-term capital gains, long-term capital gains, return of capital, and one-time special payments.

Meanwhile, other sites may count certain parts of the distribution, but may exclude others based on their different tax treatment or the fact that they are not considered part of the "regular" dividend payment, or a variety of other reasons.

When possible, it's best to go directly to the source. Most companies list their historical distributions on their website, and declared distributions can usually be found in their press releases. We use this data, which comes directly from each respective company, to calculate the yields we present in our various newsletters.

But again, please keep in mind that due to differences in the way yields are calculated, some financial web sites may list dividend yields that differ with the ones we present in our newsletters. Because many sources calculate yields differently, these types of discrepancies are unavoidable.

Why do the payout ratios listed in your newsletter differ from those found on financial web sites?

Payout ratios may vary on different financial web sites. One of the reasons for the discrepancy is that the dividend payout can be calculated as a percentage of cash flow instead of reported earnings. The payout ratios of securities such as real estate investment trusts, limited partnerships, Canadian income trusts, and telecom firms can seem deceptively high if they are based on earnings instead of available cash flow. That's because these companies typically have very high non-cash depreciation expenses, which reduce earnings but don't affect the cash flow available to shareholders.

When writing our High-Yield Investing newsletter, we take great care to list the most appropriate payout ratio for each particular security we mention. In many cases, we'll list payout ratios as a percentage of available cash flow instead of earnings. We calculate this data by reviewing each firm's latest annual financial statements. 

Since we often use cash flow data instead of earnings, the payout ratios we reference in High-Yield Investing may differ from what you'll find on other financial web sites.

Can the ex-dividend date for a security occur after the payable date? 

As you may have already noticed, securities often increase in share price between the time the dividend is announced and the ex-dividend date. Likewise, the same security will many times fall the day of the ex-dividend date. This is due to investors buying up shares to capture the dividend and then selling them after they are guaranteed to be a shareholder of record for the upcoming dividend payment. 

Whenever a company makes an abnormally large dividend payment, they are required by the exchanges to postpone the ex-dividend date until after the payment date. This way, the security is somewhat protected against a quick run-up in the share price, followed by a sharp crash after the ex-dividend date. 

Take a look at this example from Saks Inc. (NYSE: SKS):

"The special dividend will be payable on May 1, 2006 to shareholders of record as of April 14, 2006. Because of the magnitude of the special cash dividend, the New York Stock Exchange has determined that the ex-dividend date will be May 2, 2006, the business day following the payable date for the special cash dividend. Shareholders of record on the April 14, 2006 record date who subsequently sell their shares of common stock prior to May 2, 2006 will also be selling their right to receive the special cash dividend."

Under normal circumstances, the ex-dividend date falls before the record date. In that case, an investor may buy a dividend-paying stock the day before it goes ex-dividend, sell it on the ex-dividend date, and still receive the payment. This leads to higher volatility.

However, in the case of Saks, the investor must buy the stock by April 11, 2006 (keep in mind it takes three days for a stock trade to settle and for the investor to be shown as a shareholder of record). Then this investor must hold the stock until the ex-dividend date of May 2, 2006. This arrangement of dates forces investors who are buying the stock for the dividend to hold shares of SKS for at least several weeks. As a result, it reduces the volatility in the firm's share price.

Can some securities (like MLPs) be taxed, even when held in a tax-advantaged account like an IRA?

For securities like master limited parternships, it actually doesn't matter whether its a Roth IRA, 401 (k), education account or any other kind of tax-advantaged account. The return of capital payments that you receive from MLPs are considered UBTI (unrelated business taxable income) and that means you WILL owe taxes if it's in a tax-advantaged account. There is an exemption for the first $1,000 of UBTI payments per year -- that's a total figure for all tax-advantaged accounts, not a per partnership figure.

The tax accounting for these things isn't really all that bad -- at least not as bad as some make it out to be. And the MLPs actually keep track of everything for you in terms of cost basis, etc. They all have K-1 help lines you can call if you can't work out how to pay the taxes. However, owning them in an IRA adds multiple layers of complication and is best avoided.

Thank you for taking the time to review my newsletter, and good investing in the coming weeks!

Carla Pasternak
Editor
High-Yield Investing
http://www.StreetAuthority.com

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