Dividend Investing Q&A: Buybacks, REITs and Position Sizing

January 17, 2025 | Get the latest insights on AAII’s Dividend Investing strategy, 2025 earnings reports, record dividend payouts, and answers to member questions.

This week, I answer questions about the DI strategy and share insights about the latest earnings reports.

Before we dive in, remember that the U.S. financial markets and banks will be closed on Monday, January 20, in observance of Martin Luther King Jr. Day. The AAII office will be closed as well.

Here are this week’s deets:

• Preliminary data shows that a record dollar amount of dividends was distributed by S&P 500 index companies in 2024.

• Though the DI model portfolio switched to paper trading, it does hold one share of each stock to track the bid/ask spread and the timing of dividend payments.

• BlackRock Inc.

• (BLK) beat analysts’ earnings expectations while UnitedHealth Group Inc.

• (UNH) reported in-line results.

Answering Viewers Questions

Several questions were asked by AAII members during my DI webinar last week. Though I answered several “on air,” I share more answers with you here.

Buybacks

Stock buybacks and their impact on dividends were common topics. S&P 500 companies repurchased $918.4 billion of stock over the 12-month period ended September 2024, based on preliminary data from S&P Dow Jones Indices. This compares to $787.3 billion for the 12-month period ended September 2023.

Dividend payments totaled $616.2 billion as of last September, per S&P Dow Jones Indices. Earlier this week, First Trust Portfolios published a note estimating that, based on their preliminary data, a record $630 billion in dividends was paid by S&P 500 companies in 2024.

Dividends and buybacks can and do coexist. While I like both, I personally prefer dividends over buybacks because dividends are a commitment from the company to the shareholders.

REITs & MLPs

Real estate investment trusts (REITs) and master limit partnerships (MLPs) were also common topics. Both are excluded from the DI model portfolio for tax reasons. REIT distributions are generally taxed at ordinary income rates and not the lower qualified dividend tax rates. MLPs come with tax complexities. The DI strategy prefers to keep the model portfolio simple from a tax perspective.

REITs can be analyzed via the DI Dividend Grader. Prologis Inc. (PLD) has good dividend pillar grades, for instance. (Prologis was merely a name that came to mind—I haven’t looked closely at it.) I would encourage you to do further analysis since the financial structure of REITs is different from traditional corporations. Brad Thomas wrote a good article about the key criteria to look for in a REIT in the November 2022 AAII Journal.

DI Portfolio Management

Clarification was requested on the shift to paper trading for the DI model portfolio and other AAII portfolios. Paper trading is a common practice among investment newsletters. In addition, the change ensures that the dollars that were held within AAII’s model portfolios are available for operational needs.

The model portfolios do hold one share of each stock in a brokerage account to capture the bid/ask spread and monitor the payment date of dividends. All position sizes are determined by starting with the full dollar amount of cash that would have been available to invest had the portfolio continued as a real-money portfolio. The amount is then adjusted to reflect an amount equal to average size of all holdings. The math for calculating this is simply total portfolio value divided by 24 stocks. If the theoretical amount of available cash exceeds this number, the balance is set aside for future reinvestment.

A few subscribers asked about the former DI monthly report. When we discontinued publishing the report last summer, 400 subscribers paid to have the monthly newsletter delivered via mail. Most subscribers read the DI content online. Much of the information that was provided in the report is available on the DI website. I’ve also expanded these weekly emails to provide you with more timely information, including analysis of the stocks held in the DI model portfolio.

The First DI Earnings Reports of 2025

Fourth-quarter 2024 earnings season for companies operating on calendar years started this week. BlackRock reported a positive surprise while UnitedHealth Group was only modestly above analysts’ expectations. Including Nike Inc.’s (NKE) positive surprise last month, the DI portfolio’s fourth-quarter earnings scoreboard now stands at two beats and one in-line report.

BlackRock earned $11.93 per share on an adjusted basis, versus the S&P Global consensus estimate of $11.217 per share. Record inflows of $641 billion in investor dollars contributed to the surprise. CFO Martin Small guided for the repurchase of $1.5 billion worth of stock in 2025. Small also expects to seek board approval for a dividend increase “later this month.” Last year, BlackRock raised its dividend on January 12.

UnitedHealth Group earned $6.81 per share on an adjusted basis. The amount was 1.49% above the S&P Global estimate of $6.71 per share, which counts as an in-line result. CFO John Rex guided for a 2025 medical care ratio of 86.5%, one full percentage point higher than 2024. This ratio is the percentage of premiums paid out as claims. A combination of factors is contributing to this guidance, including higher risk scores for Medicare Advantage patients (coding intensity) and higher drug costs. Nonetheless, Rex predicted that “cash flow from operations will approach $33 billion, or 1.2 times net income.”

Dividend News

Texas Instruments (TXN) declared a regular quarterly dividend of $1.36 per share. The dividend is payable on February 11, to shareholders of record as of January 31. The stock will trade ex-dividend on Friday, January 31.

Pfizer Inc. (PFE) will trade ex-dividend on Friday, January 24.

No model portfolio holdings will pay a dividend next week.

Two stocks will report earnings next week: Abbott Laboratories (ABT) on Wednesday, January 22, and Texas Instruments on Thursday, January 23.

Finally, we hope those of you in the Los Angeles area are safe.