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Dividend Stock Glossary
Frequently heard dividend stock terms
Adjusted funds from operations (AFFO)
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
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.
Callable
A security such as a bond or preferred stock that the issuer has the
right to redeem prior to maturity.
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.
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)
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.
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.
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.
Distributable Cash Flow
(DCF)
Used mainly by MLPs, distributable cash
flow is Net Income + Depreciation, Amortization & Other non-cash
expenses - maintenance Capital Expenditures.
Distributable Cash Flow
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 Yield
The price you pay for a stock divided by the expected next 12-month's
dividends. For example, your expected dividend yield is 10 percent if
you pay $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 percent yield on the same shares.
Downstream
The refining and marketing sectors of the oil and gas industry.
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.
Ex-Dividend Date
The first day that new buyers are not eligible to receive the next
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.
Fannie Mae
The Federal National Mortgage Association (FNMA), a quasi-government
organization set up to facilitate mortgage lending by buying mortgage
loans from banks and other mortgage originators.
Funds Available for Distribution (FAD)
Cash available to pay dividends. Generally 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)
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.
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 quasi-government
organization set up to facilitate mortgage lending by buying mortgage
loans from banks and other mortgage originators.
Gross Leasable Area (GLA)
Property available for lease.
Ground Lease
Tenant is responsible for constructing buildings and other improvements
on leased land.
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.
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.
Jumbo Mortgage
A loan with an amount above the maximum limit set by Fannie Mae and
Freddie Mac, the two quasi-government corporations that buy
mortgage loans from lenders.
Junk Bonds
Bonds issued by corporations with below investment grade ratings.
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.
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 such as Allied Capital or American Capital Strategies.
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.
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.
NAREIT
National
Association of Real Estate Investment Trusts, Inc. A REIT trade group.
Natural gas liquids (NGL)
The portions of gas from a reservoir that are liquefied at gas
processing plants or other facilities. NGL is also called liquefied
petroleum gas (LPG).
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 REITs. According to
GAAP, real estate properties are valued at their original purchase price
less accumulated depreciation. As you undoubtedly know, 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.
Master Limited Partnership (MLP)
Similar to a real estate investment trust (REIT), except MLPs are not
limited to a specific industry compared to REITs which must invest in
real estate. Both types trade like stocks on the New York Stock
Exchange, and both types must distribute most of their earnings in the
form of dividends.
Mortgage REIT
A REIT that invests in mortgages and other debt instruments secured by
real estate.
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.
Payout Ratio
Percentage of net income paid out in dividends.
Preferred Stock
Preferred stock is a debt instrument, something like a bond. Preferred
shareholders are paid ahead of common stock holders in the event the
corporation is liquidated. Convertible preferred shares can be converted
into common stock according to predetermined conditions.
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.
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
A portion of a REIT's dividend 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 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.
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.
Upstream
The exploration and production (E&P) sectors of the oil and gas
industry.
Tenant Improvements
Construction costs to prepare a specific tenant’s space for occupancy.
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.
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). |
