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Dividend Stock Glossary

Dividend stock terms

by Harry Domash

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Adjustable Rate

Annual dividend varies depending on predefined factors.

Adjusted funds from operations (AFFO)  

A cash flow term used mainly by real estate investment trusts (REITs). See funds available for distribution (FAD). 

American Depository Receipt (ADR)  

Foreign stocks trade in the U.S. in the form of American Depository Receipts (ADR). An ADR represents a specified number of shares of the foreign company’s stock and trades just like a stock.

Anchor Tenant

Large retailer that serves as the primary draw for a shopping center.

Average Daily Volume

Average number of shares traded per day over a specified period.

Backwardation

When a commodity's spot prices are higher than the commodity's futures prices.

Bakken Shale

A formation of sedimentary rocks underneath the states of Montana and North Dakota ranging in depth from 4,500 to 7,500 ft.. Estimated to contain 4.3 billion barrels of crude oil (see Hydraulic Fracturing).

Balance Sheet

A financial statement listing a company’s assets (what it owns) and liabilities (what it owes) as of a specific date, usually the last day of a company’s fiscal quarter. The difference between a company’s assets and liabilities is termed its net worth or shareholder’s equity. 

Barnett Shale

A 6,500 sq. mile formation of sedimentary rocks around 8,000 feet deep underneath the city of Fort Worth, Texas and surrounding areas. Estimated to contain 43.4 trillion cubic feet of natural gas (see Hydraulic Fracturing).

Barrel

A unit of measure for oil and petroleum products that is equivalent to 42 U.S. gallons. 

Basis Point

An interest rate measurement equal to one-hundredth of one percent. For instance, 50 basis points equals 0.5 percent and 100 basis points equal one percent. 

CAGR 

Compound Annual Growth Rate is year over year growth rate of an investment.

Callable 

A security such as a bond or preferred stock that the issuer has the right to redeem prior to maturity.

Call Date

Earliest date that preferred stocks can be called. Usually five years after the issue date.

Call Price

Price issuer will pay to redeem preferred stock when called. Usually the same as the issue price.

Cap and Trade

Government regulations that set a maximum limit (cap) on the carbon dioxide and other gas emissions that can be emitted by a specific facility, such as a power plant. The government issues credits that allow the companies to emit the cap amount. Companies that emit less than the cap may trade or sell their unused credits to other companies.

Capital Ratio

The ratio of a bank's capital to its assets judged to be at risk. The Fed requires a minimum capital ratio of 4% to 8%, depending upon the type and quality of its assets. The Tier 1 Capital Ratio is the Tier 1 capital divided by risk-weighted assets. Here are the definitions of the three capital levels for a bank.

Tier 1 Capital: common shareholders' equity, Trust Securities, minority interests and qualifying preferred stock, less goodwill and other adjustments.

Tier 2 Capital: preferred stock not qualifying as Tier 1 Capital, mandatory convertible debt, limited amounts of subordinated debt, other qualifying term debt, the allowance for credit losses up to 1.25% of risk-weighted assets and other adjustments.

Tier 3 Capital: subordinated debt that is unsecured, fully paid, has an original maturity of at least two years, is not redeemable before maturity without prior approval by the FRB and includes a lock-in clause precluding payment of either interest or principal if the payment would cause the issuing bank's risk-based capital ratio to fall or remain below the required minimum. 

Capitalization Rate

The capitalization rate (or "cap" rate) for a property is the property's net operating income divided by its purchase price. Generally, the higher the cap rate, the higher the return on investment.

Capitalize

Costs of items such as buildings, equipment and other items with a useful lifetime exceeding one-year are categorized as assets to be depreciated over a number of years, rather than being expensed in the year of purchase. 

Carry Trade

Profiting on interest rate differentials. For instance, borrowing money at a relatively low short-term rate and lending it out a higher long-term rates.

Cash and Carry Trade

A strategy involving purchasing a security and selling the corresponding futures contract.

Cash available for distribution (CAD) 

See funds available for distribution (FAD).

Closed-End Fund

A special type of mutual fund.  A closed-end fund sells a fixed number of shares when it starts business via an IPO. After that, the fund doesn't buy or sell shares. Instead, its shares trade like stocks and must be purchased from existing holders or sold to willing buyers. Click here for more on closed-end funds.

Collateralized Debt Obligation (CDO)

A security made up of a portfolio of debt instruments or bonds.

Contango

The condition when futures prices for a commodity exceed current spot prices.

Convertible

Preferred stock holders have the right to convert shares to common stock at predetermined ratio after a specified date. This gives preferred holders a chance to benefit from the common stock’s share price appreciation.

Coupon Rate

Preferred stock or bond yield based on initial issue price.

Crack Spread

For an oil refinery, crack spread is the difference between the value of refined products produced and the cost of the crude oil need to produce the products. In effect, crack spread is the gross margin.

Credit Default Swap

Similar to a credit insurance policy. The buyer of a credit default swap receives credit protection. The seller 'guarantees' the credit worthiness of the product.

Cumulative

A company issuing "cumulative" preferred shares must pay any skipped dividends on those shares before common stock dividends are paid and before the preferreds are redeemed.

CUSIP

A unique identification number for every security whether common stock, preferred stock, or a bond.

Distributable Cash Flow (DCF) 

Used mainly by Master Limited Partnerships (MLPs), distributable cash flow is net income + depreciation, amortization & other non-cash expenses - maintenance capital expenditures. See the Master Limited Partnerships section for more information.

Distributable Cash Flow (DCF) Coverage Ratio  

The DCF ratio measures compares total distributable cash flow  to the amount paid out to shareholders. If the DCF ratio is below 1.0, the MLP is not generating enough cash to cover its distributions. The formula is DCF Ratio = DCF per unit/distributions per unit. 

Dividend Capture

Dividend capture strategies involve buying a stock before the dividend is paid, holding it for a predetermined period, and then selling it and moving on to the next dividend stock. See the Dividend Capture Strategies section for more information.

Dividend Yield

The expected next 12-month's dividends divided by the price you paid for a stock. For example, your expected dividend yield is 10% if you paid $10 per share for a stock that you expect to pay $1 per share in dividend during the next year. If the share price doubled the next day, new investors would only receive a 5% yield on the same shares.

Downstream

The refining and marketing sectors of the oil and gas industry.

Dropdown

The sale of an asset from a Master Limited Partnership's general partner to the MLP.

Eagle Ford Shale

A 3,000 sq. mile formation of sedimentary rocks in southwest Texas ranging in depth from 5,700 to 10,000 ft.. Estimated to contain 21 trillion cubic feet of natural gas  and 3.4 billion barrels of crude oil (see Hydraulic Fracturing).

EBITDA

Earnings before deducting interest, taxes, depreciation and amortization. Considered a measure of cash earnings. 

Equity REIT

A REIT that primarily own properties as opposed to mortgage REITs. Most REITs fit that definition.

Ex-Dividend Date

The first day that new buyers are not eligible to receive a dividend. Dividend payers specify a date when shareholders of record are eligible for the dividend. Since it takes three business days for a stock purchase to take effect, you must purchase a stock three days before the 'shareholders of record' date. So the ex-dividend date is two business days before the 'shareholders of record' date (business days are defined by when banks are open in New York City, not stock market days). For example, if a firm  announces a record date falling on a Thursday, the ex-date will be on Tuesday, two days earlier (assuming Tuesday, Wednesday and Thursday are not bank holidays).

Special case: If the dividend payout is 25% or more of the share price, the ex-date is the first market day following the pay date. For example, if August 10 is the record date and August 31 is the pay date,  the ex-date is September 1, the first market day after the pay date. In this example, a seller on August 15, even though the holder of record to receive the dividend, would have to relinquish the dividend to the buyer.

Fannie Mae 

The Federal National Mortgage Association (FNMA), a government-owned organization set up to facilitate mortgage lending by buying mortgage loans from banks and other mortgage originators.

Fracking

See Hydraulic Fracturing.

Fractionation

The process of separating raw natural gas into natural gas liquids (NGLs) such as ethane, propane, and butane.

Funds Available for Distribution (FAD)

Cash available to pay dividends. Generally, it's funds from operations (FFO) less expected capital expenses such as expenses for new roofs, modernizing properties, etc. Also called ‘cash available for distribution’ (CAD) or ‘adjusted funds from operations’ (AFFO).

Funds From Operations (FFO)

A term used mainly by Real Estate Investment Trusts (REITs). According to generally accepted accounting practices (GAAP), commercial property owners must depreciate the cost of the buildings and other improvements on their land down to zero over a specified time, say 20 years. For example, assume that a building worth $20 million is depreciated evenly over 20 years. In that instance, the owner would deduct $1 million from its reported earnings annually. That works out great when the calculating income taxes, but isn’t realistic. Since construction costs increase every year, a building’s value is more likely to increase than drop.

Consequently, the National Association of Real Estate Investment Trusts (NAREIT) devised “funds from operations” or FFO, which is a more realistic earnings measure. FFO is computed by adding back the depreciation and amortization charges to net income, and excluding gains or losses from property sales. More about Real Estate Investment Trusts (REITs)

Gain on Sale Accounting

A financial firm such as a mortgage REIT sells packages of loans (securitizes) to other investors and records a lump-sum non-cash gain on the sale based on the income it expects to receive over time. Since the gains are based on management assumptions, it’s tempting for management to overstate the gain on sale figures.

Gas-to-Liquids (GTL)

The conversion of natural gas to liquid form so that it can be transported easily.

Ginnie Mae

The Government National Mortgage Association (GNMA), a government-owned organization set up to facilitate mortgage lending by buying mortgage loans from banks and other mortgage originators.

General Partner

Manages the operations of a Master Limited Partnership. The general partner typically holds a 2% general partner interest in the MLP plus additional limited partner units (shares). Click here for a list of MLP General Partners.

Gross Leasable Area (GLA)

Used by property REITs, GLA is the total square footage of property available for lease.

Ground Lease

Tenant is responsible for constructing buildings and other improvements on leased land. 

Haynesville Shale

A 9,000 sq. mile formation of sedimentary rocks located in east Texas, southwestern Arkansas and western Louisiana ranging in depth from 10,500 to 13,500 ft.. Estimated to contain up to 251 trillion cubic feet of natural gas (see Hydraulic Fracturing).

Hybrid Mortgage

A combination adjustable and fixed rate mortgage. Typically, the interest rate is adjusted once, after a predetermined period, and then the interest rate remains fixed for the remaining term of the loan. 

Hydraulic Fracturing (Fracking)

Hydraulic Fracturing, a.k.a. fracking, involves the injection of large quantities of water, sand and chemicals at high pressure down deep wells to fracture rock formations, typically shale, for the purpose of releasing natural gas or crude oil held within the rock formations.

Implied Capitalization Rate 

Net operating income (NOI) divided by enterprise value, which is market capitalization plus total outstanding debt. 

Integrated

An oil company that operates in all sectors of the industry from exploration through refining and marketing. 

Interest Coverage Ratio

A financial strength measure which is calculated by dividing EBITDA by annual interest expense. 

Issue Price

Original share price of preferred stock.

Jumbo Mortgage

A loan with an amount above the maximum limit set by Fannie Mae and Freddie Mac, the two government  corporations that buy mortgage loans from lenders. 

Junk Bonds

Bonds issued by corporations with below investment grade ratings. 

K-1 Statement

The K-1 is the federal income tax form that you must use if you own Master Limited Partnerships.

Leverage

A measure of debt. A highly leveraged company has high debt. The leverage ratio is total assets divided by shareholders’ equity. A leverage ratio of 1.0 means that the company has no debt, and the higher the ratio, the more debt. 

Leveraged Buyout

A situation where investors acquire a corporation mostly using borrowed funds. The borrowings are secured by the assets of the corporation being acquired.

Liquefaction

The process of converting natural gas to a liquid for transportation via boat by cooling the gas to -260° F.

Liquefied Natural Gas (LNG)

Natural gas that has been frozen for transportation by boat.

Marcellus Shale

A 95,000 sq. mile formation of sedimentary rocks underneath the states of New York, Pennsylvania,, West Virginia, Ohio and Maryland ranging in depth from 4,000 to 8,000 ft.. Estimated to contain 410 trillion cubic feet of natural gas (see Hydraulic Fracturing).

Market Yield

For preferred shares, yield based on current trading price.

Master Limited Partnership (MLP)

An entity consisting of a general (master) partner that controls the organization and limited partners. An MLP distributes all of its profits to the general and limited partners, and hence, does not pay corporate income taxes. When an MLP distributes profits, the general partner receives a percentage off the top (see Incentive Distribution Rights), before the limited partners get their cut.  MLPs trade on major stock exchanges, just like stocks. See the Master Limited Partnerships section for a list of MLPs. 

Maturity Date

The date when preferred shares or bonds must be redeemed by the issuing firm.

Methane

A.k.a.. natural gas, methane is a natural gas liquid (see Natural Gas Liquids).

Midstream

The pipeline and storage sectors of petroleum and natural gas industries. 

Mezzanine Financing

The type of unsecured financing most often supplied by Business Development Corporations. These loans often include an "equity kicker" such as a common stock warrant or right to convert  all or part of the loan into common stock.  See the Business Development Corporations section for more. 

When the term is used by venture capitalists, mezzanine financing is the last stage of private financing used by a company before it goes public. 

Mortgage REIT

A Real Estate Investment Trust that invests in mortgages and other debt instruments secured by real estate. Click here for a list of Mortgage REITS.

NAREIT

National Association of Real Estate Investment Trusts, Inc. A REIT trade group. 

Natural Gas Liquids (NGL)

Raw natural gas is mostly methane, but also contains ethane and natural gas liquids such as propane, butane, pentane, hexane and heptane. Unlike the liquids, methane and ethane are in gas form and require refrigeration to be liquefied.

Negative Gap

A banking term indicating a condition where interest-sensitive liabilities exceed interest-sensitive assets. 

Net Asset Value (NAV)

Book value, which is calculated according to generally accepted accounting practices (GAAP) doesn't work well for real estate investment trusts. According to GAAP, real estate properties are valued at their original purchase price less accumulated depreciation. Over time, most real property goes up in value, not down. So for equity REITs (owners of real estate as opposed to mortgage REITs), book value is meaningless.

Consequently, REITs publish the net asset value (NAV), which is the estimated current market value of its properties, in addition to book value. The Price/NAV ratio gauges whether a REIT’s share price is currently undervalued or overvalued compared to its holdings. In practice, most REITs trade at discounts to their NAV. 

Net Interest Margin

Profit margin on interest earning assets. It’s calculated by subtracting interest-related expenses from interest income, and dividing the result by the average value of interest earning assets.

Net Operating Income (NOI)

Income from real estate operations before deducting income taxes and interest expenses. Does not include fee income.

Net Income

After-tax earnings (a.k.a. bottom-line or profit). Earnings per share (EPS) is net income divided by the number of outstanding shares. 

Par Value

Meaningless for regular stocks. For preferreds, par value is the same as the issue price. For bonds, par value is typically $1,000.

Participating

A preferred stock's dividend varies depending on issuing firm’s net income or dividends paid to common shareholders.

Payout Ratio

Percentage of net income paid out in dividends. Not meaningful for firms with high values of depreciable assets such as Real Estate Investment Trusts or Master Limited Partnerships.

Preferred Stock

Preferred stock is a debt instrument, something like a bond. Preferred stocks generally pay predetermined quarterly dividends. Unlike bonds, preferred stocks trade like regular stocks. Convertible preferred shares can be converted into common stock according to predetermined conditions. See the Preferred Stock section for more.

Power Center

Shopping centers with three or more "big box" anchors such as Toys R Us, Home Depot and Target.

Real Estate Investment Trust (REIT)

REITs are a special form of corporation that invests only in real estate. REITs do not pay corporate income tax as long as they pay out at least 90% of their earnings as dividends to share owners. REIT shares trade on the major exchanges the same as any other stock. See the Real Estate Investment Trust section for lists of REITs.

Refined Petroleum Products

Gasoline, diesel fuel,  jet fuel, kerosene and heating oil.

Regasification

Conversion of liquefied natural gas back to gas form by defrosting (see Liquefied Natural Gas). 

Repurchase Agreement (REPO)

An borrowing arrangement where a holder sells securities, but simultaneously agrees to buy them back at a specified price at a later date. 

Reserve Ratio

The ratio of a bank's reserves to its demand deposits (checking accounts).

Return of Capital 

The portion of a dividend or distribution that is not taxable as ordinary income during the year paid. Instead, the return of capital reduces the shareholder's tax basis, and is taxed, usually at capital gains rates, when the shares are sold.  

Sallie Mae

Student Loan Marketing Association, a quasi-government corporation that provides liquidity for student loans.

Securitization

Packaging individual loans into a group, and then selling the loan package to investors.

Shale

A fine-grained sedimentary rock formed from the compaction of silt and mineral particles. Black shale contains organic materials that sometimes break down to form natural gas or oil. While conventional drilling can extract significant amounts of crude oil and natural gas, the majority remains trapped within tiny pore spaces or adsorbed onto clay mineral particles that make-up the shale. In the late 1990s, natural gas drilling companies developed a new technique, hydraulic fracturing, to retrieve the trapped oil and natural gas (see Bakken Shale, Barnett Shale, Eagle Ford Shale, Haynesville Shale and Marcellus Shale).

Spark Spread

The equivalent of gross profit margin for power plants, the spark spread is the difference between the selling price of power and the cost of fuel (natural gas or coal) needed to produce it.

Specials Dividends

Unexpected one-time payouts, possibly in addition to regular dividends. Often, firms declare special dividends as a way of transferring profits to major shareholders. Many investors try to profit from special dividend announcements by buying a stock before the ex-dividend date, collecting the dividend, and then selling. Special dividends that total 25% or more of the trading price are subject to special rules regarding the required holding period. In those instances, to collect the dividend you must purchase before the ex-dividend date and hold until at least day after the pay date.

Dividend Detective Premium offers a Special Dividends announcement report that features special dividend announcements that in DD's view, are investible. Here's a link.

Straight Lining

The practice of accounting for a tenant’s rent payments over the life of a lease as equal yearly payments, even though the actual payments vary from year to year.

Subordinated Debt

Debt that is junior to other (senior) debt. That is, in the event of bankruptcy, the subordinated debt would have lower priority than the more senior debt.

Tenant Improvements

Construction costs to prepare a specific tenant’s space for occupancy.

Third Party Trust Preferred

A Trust Preferred issued by a third party such as an underwriter.

Total Return

The total annual return you receive on a stock is the dividend yield plus the stock price appreciation over the year.

Triple Net Lease

A lease that requires the tenant to pay all maintenance, taxes, insurance, and other expenses related to the leased property. 

Trust Preferred

A type of preferred stock that provides certain income tax and accounting advantages over traditional preferreds to the issuer. If the issuer suspends dividends, shareholders may still be liable for income taxes on the unpaid dividends. 

Umbrella Partnership REIT (UPREIT) 

Instead of owning properties directly, the REIT is the general partner and has a majority interest in a partnership that owns and manages the properties. The UPREIT structure offers tax advantages to a property owner, when the owner converts to a REIT via an IPO (initial public offering). 

Upstream

The exploration and production (E&P) sectors of the oil and gas industry.

Yield to Call

Annualized return you would receive on a preferred stock or bond assuming that the security is redeemed on the call date.

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