When Is Enough, Enough?

I am reminded of the old story about a farmer that said to his wife, "I told you 'I love you' when we got married and if anything changes, I'll let you know." Most of us require a little more frequent feedback than once-in-a-lifetime. The same is true with my dividend investments.

In the U.S. and Canada, most companies pay dividends quarterly. In other parts of the world, it is not uncommon for companies to pay an annual or a semi-annual dividend. That is not to say that North American companies sometimes choose not to pay quarterly dividends. For many years McDonald's (MCD) and Walt Disney Co. (DIS) paid an annual dividend. MCD now pays quarterly wile DIS has joind Ruby Tuesday, Inc. (RT) paying a semi-annual dividend. Going in the other direction, there are some companies and CEFs/ETFs that pay monthly dividends. These include Realty Income Corp (O) and Eaton Vance Tax-Advantaged Global Dividend Fund (ETO).

Some have predicted that more companies would move to annual dividends, but has not been much movement in that direction. As noted above, MCD has moved back to paying quarterly dividends while DIS moved to semi-annual dividends. Around the year 2000, several other companies such as AT&T (T), Wal-Mart Stores Inc. (WMT), Coca Cola Co. (KO), 3M (MMM) and Home Depot (HD) considered moving to annual dividends, but ultimately rejected the change. So why would a company risk annoying its shareholders' and moving to an annual dividend?

Reasons For an Annual Dividend

1. Save on Administrative Costs: Many companies popular with kids such as McDonald's and Disney, have a large number of shareholders that hold a small number of shares. It cost 4 times as much to mail four $0.50 dividend checks instead of one $2.00 check.
2. Generate Additional Income: Funds used to pay dividends at the end of the year can be invested  (or to pay down debt) and earn a return during the year. This is diminished if dividends are paid more frequently.

Reasons Against an Annual Dividend

1. Shareholders Have Come to Expect Quarterly Dividends: Some shareholders of dividend companies use the dividends to pay living expenses. Receiving a single annual distribution and allocating it over the upcoming year would be difficult for some. In addition, the transition would prove financially problematic for those with insufficient resources.
2. Dividends Provide Frequent Assurances of the Company's Health: In November 2007 when holds their dividend flat it is an indication to the market the extent to which the company is struggling. Since you can't fake cash, dividends are a strong scorecard in judging the company's financial health. If you had a treatable disease would you rather know in 3 months or 12 months?

For me, quarterly dividends provide a perfect balance between to much administrative work (for me and the company) associated with monthly dividends and too little financial feedback from the company associated with annual dividends. How do you feel about annual dividends?

Full Disclosure: Long MCD, O, ETO, WMT, KO, MMM,

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