Premium Dividends: The Market's Best Kept Secret
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
By now, most of you are probably familiar with dividend reinvestment plans (DRIP's), but did you know the deal gets even better? Yes, it's true. So, what am I talking about? DRIP's with premium dividends. You may be asking, "What's a premium dividend?" It's simply a bonus on the declared dividend, which companies provide to long-term "buy and "hold" investors. Trust me, it's a sweet deal.
So, let's look at some companies which provide this benefit. So far, one of the best of the breed (and somewhat a growth stock) is Enbridge (NYSE: ENB). Given current movements in energy transportation across Canada (and into the U.S.), Enbridge, a Canadian corporation, represents an excellent stock, which combines an attractive balance sheet, while still maintaining room to grow. In terms of the overall value of the DRIP, we can consult the company's investor relations (IR) site for further explanation of its particulars. In brief, long-term "Buffett investors" receive a 102% dividend. pegged at $0.40 (including the bonus) per share, when reinvested in the company. That being said, the premium dividend, at least when it comes to U.S.-based investors, must be countered-balanced with U.S.-Canada tax treaty, which levies a 15% withholding tax on U.S. investors. However, in my estimation it's a solid deal, since the foreign taxes me either be deducted from an individual's tax return or a tax credit is provided up to specified limits. As a bonus, a 2009 change in the the tax treaty exempts Americans from paying a foreign dividend tax if the stock is held in an IRA or other retirement account.
So, let's look at some other companies offering premium dividends. While, not technically a "premium dividend," Aqua America (NYSE: WTR) offers a 5% stock purchase discount using dividend reinvestment, which equates to the same outcome, purchasing more stock at a discount to the current market price. Pretty good deal. Plus, since the stock is a U.S. company, foreign dividend withholding taxes do not apply, definitely something to think about moving forward.
Next, we'll look at Enerplus (NYSE: ERF), a Canadian energy royalty corporation. Perhaps, the first aspect, which comes to mind when analyzing the company is its sky-high dividend payments and they occur monthly, which as far as DRIP's go, is an extremely good aspect for continuous stock purchase compounding. However, one should keep payout ratios in mind when contemplating making a company a long-term holding, which is extremely high in this case, but otherwise difficult to pinpoint due to Enerplus paying oil and natural gas royalties directly to the stockholder. Bottom-line, the company offers a 5% discount on additional stock purchases using existing monthly dividend payouts.
These are just a few! There are even more premium dividend stocks. While, no stock is a sure thing, each one has its advantages and disadvantages and must be carefully weighed prior and during investment. But some stocks are a lot better quality than others. By examining each opportunity carefully, you'll go a long way toward improving your investing skills and learning how to separate out the most attractive investments, premium dividend, or otherwise, from the rest.
dmercer1 has no positions in the stocks mentioned above. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Aqua America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!