I’ve been getting a lot of great questions recently, so today I want to take some time to answer a couple of the most popular and important topics that have been coming up.
The first one is about stock splits and dividends …
“What happens to my dividend payments when a stock splits?”
A lot of investors misunderstand stock splits — in my opinion, they are neither inherently good nor bad. Companies simply do them to keep their share prices more “affordable” — in other words, the dollar amount it takes to buy a single share is lower.
Of course, a given investment amount is still buying you the exact same stake in the company!
The reason is simple: All the stock’s attributes simply get divided by the split factor. In other words, a 2-for-1 stock split means each share is now paying out half as much in dividends as it was before. But since you now have twice as many shares, nothing has really changed.
Please note that stock spin-offs are a completely different matter. This is when a company decides to divide up into separate pieces and issues new shares in the process. Abbott Laboratories, one of my current recommendations in Income Superstars is doing this right now. If you’re a subscriber, I’ll have a full update on that in your next issue.
Meanwhile, a reader named Wayne recently wrote in to ask me …
“How can I protect my U.S. dollars through purchasing international income stocks since I have to use U.S. dollars to buy and sell them?”
The beauty of buying foreign dividend stocks is that you can benefit from any negative moves in the U.S. dollar two different ways:
#1. From inherent moves in the share price.
#2. From dividend payments that represent more dollars once translated from the company’s home currency.
Remember, even though you are going through a U.S. exchange and using dollars, you are still purchasing an overseas company. As such, everything related to your holding is originally priced in a foreign currency.
Therefore, if the currency strengthens against the dollar, the share price and dividends will automatically get what I like to call a “currency kicker.”
Obviously, the opposite can also be true if the dollar rises against the company’s home currency. But even then, I think it’s important to own some foreign dividend stocks just for the extra diversification they give a portfolio.
Speaking of diversification, I recently got a question from Anthony who asked …
“What do you think about the longer-term outlook for airline industry investments, especially the regionals?”
My favorite quote on investing in airlines comes from Warren Buffett. Back in 1994, he famously said …
“If a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money. But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in.
“I have an 800 number now that I call if I get the urge to buy an airline stock. I call at 2 in the morning and I say: ‘My name is Warren, and I’m an aeroholic.’ And then they talk me down.”
I’m with Buffett on this one — commercial airlines are great for getting places, but notoriously bad investments. Huge fixed costs … unpredictable fuel prices … massive regulatory oversight … there are just so many reasons your business can go into the toilet.
Does that mean there’s NEVER a chance to make money on them? Of course not.
But conservative investors, particularly those looking for steady income, are better off looking elsewhere. After all, even Southwest — which is one of the best-run companies in the business — only pays a paltry dividend worth 0.4 percent annually.