Categories
Income Investing

Why Invest in Dividend Stocks

There are great reasons to invest in dividend stocks. And most are not taught in business school.

Anyone who went to school for finance learned that – all things equal – a company’s dividend policy should theoretically have no impact on your investment decision-making.

Since transaction costs are minimal and taxes a wash, you should be indifferent as to whether you are paid a dividend or manufacture a dividend (by selling shares). In theory, a dividend simply takes something that is already yours (cash on the corporate balance sheet) and places it in your personal bank account.

Reality is quite different – there are great reasons to invest in dividend stocks.

At the corporate level, there are a number of arguments as to why some companies should pay dividends. Perhaps the biggest is that dividends enforce discipline on company management by restricting cash flow. This forces managers to limit projects to those with a higher IRR (Internal Rate of Return).

In contrast, cash-rich companies that don’t give cash back to shareholders are more likely to waste money on low IRR projects or acquisitions that only serve to bolster executive pay. Instead, these companies should be giving cash back to shareholders who can then re-allocate to companies with higher return projects.

Dividend policy can also signal insiders’ confidence in the future. The current economic crisis is a perfect example. While some companies have recently cut their dividend (e.g. Wells Fargo) to free up cash in a collapsing environment, others have actually raised dividends. A company that raises its dividend during an economic depression signals to the market the resilience of its cash flows. In today’s environment, I’m much more comfortable giving my hard-earned cash to companies that are still raising dividends.

At a more personal level, I like dividends because they help me stay disciplined. A stock with a 5% dividend yield at the time of purchase provides me a 5% return regardless of the stock price. Knowing this, I’m less likely to make emotional buy and sell decisions. It’s purely psychological, but a known cash return that accumulates in my account beats an unknown potential return that sits in a company’s account (or is tied up in other corporate assets).

While I can manufacture those cash dividend returns by selling shares as they increase in value, this requires more intervention on my part. Do I systematically sell each quarter? Or only sell when share prices rise to crystallize some of my gains? Do I sell a fixed percentage or dollar amount? Do I stop selling when prices fall?

While these questions can be answered and a systematic process created, the emotional gyrations of the market could make me change the process at the worst time. In contrast, if a stock declines but I know I’ll continue to receive my 5% dividend I’ll be more inclined to hold on.

If you’re like me, activity is detrimental to your investing returns. The more I sit tight, the better I do. So any investing strategy that helps me avoid unnecessary activity is helpful.

Categories
Income Investing

8 Recent Dividend Raises by Canadian Companies

Why are dividend raises important?

Because any management team that has the conviction to raise a dividend during an economic depression is confident in their company’s ability to pay that dividend in perpetuity. They have every excuse to not raise the dividend, yet they made the explicit choice to do so. This level of conviction from company insiders gives me – the investor – greater confidence in the viability of the business and its ability to pay its bills while generating enough free cashflow for stockholders.

Here are a few Canadian (TSX-listed) companies that have recently raised their dividends. This isn’t necessarily a recommendation to buy, but use this information as part of your mosaic of research into dividend paying stocks.

These announcements all happened between June and August 2020:

Barrick Gold

Declared a dividend of 8c (US$) / share, a 14% increase on the previous quarter’s dividend.

Ritchie Brothers Auctioneers

Increased dividends by 10% to $0.22.

TMX Group

Increased dividend by 6% to $0.70 per common share.

Centerra Gold

Increased quarterly dividend by 25% to C$0.05 per common share.

Capital Power Corp

Declared a quarterly dividend of $0.5125 per common share compared to the previous $0.48 dividend represents a 6.8% increase, and an annualized dividend of $2.05 per common share.

Yamana Gold

Increased its annual dividend by a further 12% to $0.07 per share.

Canadian Pacific

Increased dividends by 14.5% to $0.95.

Empire Company Ltd

Declared a quarterly dividend of $0.13 per share, an increase in the annualized dividend rate of 8.3%.

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Income Investing Investing

S&P/TSX 60 Dividend Yields (July 31, 2020)

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ETFs and Funds Income Investing Investing

Review: iShares S&P/TSX Composite High Dividend Index ETF (XEI)

A reader recently asked me about the TSX-listed iShares S&P/TSX Composite High Dividend ETF (XEI). XEI invests in a range of dividend paying Canadian companies and features a 6.26% distribution yield (June 30, 2020). The ETF pays roughly $0.075 to $0.091 per share on a monthly basis providing an attractive income stream. XEI’s management fee is 20bps.

Is XEI too good to be true? Or is it a great income provider?

Currently, XEI remains about 26% below its February 20, 2020 peak before the Covid-19 market crash. In comparison, the S&P/TSX Composite Index only remains about 13% below it’s February 20th level. This divergence can mainly be explained by differences in the holdings. The S&P/TSX Composite Index, for example, holds gold miners and Shopify which have been performing very well since the March 23rd bottom. In contrast, XEI is heavy into financials and energy, both of which have lagged. As a dividend fund this makes sense.

XEI seeks to replicate the S&P/TSX Composite High Dividend Index. For this reason, the growth and momentum names that don’t pay dividends are excluded from the portfolio.

Effective June 13 2017, the fund’s name was changed from iShares Core S&P/TSX Composite High Dividend Index ETF to iShares S&P/TSX Composite High Dividend Index ETF.

XEI Construction

To understand how XEI operates, one must look at the methodology of the underlying index. The S&P/TSX Composite High Dividend Index consists of 50 to 75 stocks selected from the S&P/TSX Composite focusing on dividend income. The index is market-capitalization weighted, with stocks capped at 5% and each sector capped at 30%. The index rebalances quarterly.

To be included in the index, a stock must be a member of the S&P/TSX Composite and have a non-zero indicated annual dividend yield. Selection is done step by step, as follows:

  1. As of the reference date for the Composite rebalancing, S&P Dow Jones Indices determines the median indicated annual dividend yield of all stocks in the S&P/TSX Composite with non-zero indicated annual dividend yields.
  2. The 75 stocks with the largest indicated annual dividend yield, from those stocks which have indicated annual dividend yields above the median calculated in step 1, are selected to form the index. Current index constituents are not removed unless their indicated annual dividend yield falls below the 85th position. Stocks that are not current index constituents with an indicated annual dividend yield ranking above the 65th position are automatically added to the index.
  3. If step 2 yields fewer than 75 stocks but more than 50, stocks with indicated annual dividend yields greater than or equal to the median form the index. The buffer thresholds given in step 2 continue to be 10 ranking positions above and below the number of constituents.
  4. If there are fewer than 50 stocks with indicated annual dividend yields above the median, stocks are added in descending order of indicated annual dividend yield below the median until a total of
    50 stocks are included.

The index is market-capitalization weighted subject to a maximum weight of 5% for each stock and 30% for each GICS Sector. The caps are established at the quarterly rebalancing and are not revised until the next quarterly rebalancing.

Based on this methodology, the portfolio will provide exposure to the highest-yielding dividend stocks in the S&P/TSX Composite Index, regardless of quality. Unlike some other dividend ETFs, XEI doesn’t factor in dividend growth or longevity.

Performance

Since its April 2011 inception, on an annualized basis XEI has returned 3.09% (ending June 30, 2020). If you held until January 31, 2020 (thus avoiding the Covid-19 mess), you would have received an annualized 6.27%.

Looking back 5 years (ending June 30, 2020), XEI returned 1.23% annualized vs. S&P/TSX Capped Composite Index’s 4.45%.

For the 5 years ending January 31, 2020, XEI returned 5.62% annualized vs. S&P/TSX Capped Composite Index’s 6.53%.

While fees can explain some of the difference vs the broad benchmark, it is clear that the lack of growth names has caused total returns to lag somewhat – especially recently.

Why is the distribution yield so high?

XEI sports a 6.26% distribution yield. While total returns matter, many investors are attracted to this yield. The yield is based on the underlying components of the ETF, 49.08% of which is concentrated in the top 10 holdings.

The top 10 stocks held by XEI have dividend yields ranging between 4.74% and 8% (as of June 26, 2020). These ten holdings contribute to about half of XEI’s overall distribution.

Many funds top up their distributions by returning capital to investors. In contrast, XEI is mostly distributing dividends the fund receives from underlying holdings. In 2019 about 8% of the distribution was considered return of capital, whereas in 2018 and 2017 there was none. Most of XEI’s distribution is organic as opposed to manufactured.

Exposure

While XEI imposes a 30% cap on sector weights the fund is still quite concentrated. I would expect this, given the nature of how the ETF is constructed (essentially a sort and rank of dividend paying stocks). Naturally, XEI will have higher exposure to areas of the market that have higher dividend yields – financials, energy, utilities. 73% of the ETF is concentrated in these three sectors.

Bonus concern

It is interesting to note XEI’s high portfolio turnover. Clearly this has to do with the construction and rebalancing methodology.

Compare XEI’s 2018 turnover of 49.86% to that of the FTSE Canadian High Dividend Yield Index ETF (VDY), which is just 22.90%. This may be a nothingburger, but higher turnover strategies tend to be indicative of higher costs. However, with XEI’s management fee of just 20bps this doesn’t appear to be much of a concern.

My verdict

XEI will never hold high-flyers like Shopify or junior gold miners. So investors need to recognize that it might underperform the broad market during periods in which momentum or growth are favoured.

Given the construction methodology, it is expected that many names within XEI might have historically been poor performers. (Dividend yields rise as stock prices fall.) There is no discretion applied to what names are in XEI, so there inevitably will be a mix that could includes dogs at risk of dividend cuts. Luckily exposure to any single company is limited to 5% at the time of rebalancing.

There may also be companies with well-supported dividends that have simply underperformed (driving up the yield) for other reasons.

Conclusion: don’t buy XEI for the yield. Buy it because you like most of the companies it holds. If you think most of the underlying holdings will continue to pay their dividends and are good long-term holdings, then XEI is a convenient way to invest in those companies.

Categories
ETFs and Funds

5 Top Dividend ETFs in Canada

Investing in Canadian dividend paying stocks has never been easier. To do this you can either buy one or two dozen individual stocks or you can buy an ETF that already owns a basket of dividend paying companies.

Of course, the convenience of buying an ETF comes with a small price. Between 10 and 60bps, the management expenses paid for simplified access do compound over time. Still, for many the ETF option makes the most sense.

Many people don’t have time to track many individual stocks. Some investors might have little to invest. Others might not even know what to look for when choosing an individual stock. For these people, an ETF might be the best way to invest in dividend stocks.

Personally, I like the way a broadly diversified dividend ETF can help me mitigate the risk of problems with any one individual company. An ETF also allows me to make asset allocation changes and new contributions with relatively few trades. Also, those who work in the investments industry know that ETFs remain off the compliance radar providing easier buy/sell execution.

I still bolt on a few individual dividend stocks here and there to enhance certain exposures. But ETFs remains the core to my dividend portfolio.

Below I list out five of the top dividend ETFs in Canada. I first provide high-level summary stats and then go deeper into each individual portfolio. Finally, I provide my conclusions at the end.

Summary Stats

NameBMO Canadian Dividend ETFiShares S&P/TSX Canadian Dividend Aristocrats Index ETFiShares Canadian Select Dividend Index ETFVanguard FTSE Canadian High Dividend Yield Index ETFiShares Core MSCI Canadian Quality Dividend Index ETF
TickerZDVCDZXDVVDYXDIV
Expense Ratio0.35%0.60%0.50%0.20%0.10%
Yield5.57%5.24%5.71%5.17%5.26%
% Financials33.88%25.26%59.85%58.30%56.42%
% Energy15.25%9.64%6.30%30.00%17.72%
% Top 1030.00%19.95%58.37%73.68%77.75%

BMO Canadian Dividend ETF (ZDV)

This ETF seeks to replicate the performance, net of expenses, of the Dow Jones Canada Select Dividend Index. The index is comprised of 30 of the highest yielding, dividend-paying companies in the Dow Jones Canada Total Market Index, as selected by Dow Jones using a rules-based methodology including an analysis of dividend growth, yield and average payout ratio.

Top 10 Holdings (30.00%)

iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (CDZ)

This ETF seeks to replicate the performance, net of expenses, of the S&P/TSX Canadian Dividend Aristocrats index. The index consists of common stocks or income trusts listed on the Toronto Stock Exchange which are constituents of the S&P Canada Broad Market index (BMI). The security must have increased ordinary cash dividends every year for at least five consecutive years, and the float-adjusted market capitalization of the security, at the time of the review, must be at least C$ 300 million.

Top 10 Holdings (19.95%)

iShares Canadian Select Dividend Index ETF (XDV)

This ETF seeks to replicate the performance, net of expenses, of the Dow Jones Canada Select Dividend Index. The index is comprised of 30 of the highest yielding, dividend-paying companies in the Dow Jones Canada Total Market Index, as selected by Dow Jones using a rules-based methodology including an analysis of dividend growth, yield and average payout ratio.

Top 10 Holdings (58.37%)

Vanguard FTSE Canadian High Dividend Yield Index ETF (VDY)

This ETF seeks to track, to the extent reasonably possible and before fees and expenses, the performance of a broad Canadian equity index that measures the investment return of common stocks of Canadian companies that are characterized by high dividend yield. Currently, this ETF seeks to track the FTSE Canada High Dividend Yield Index. It invests primarily in common stocks of Canadian companies that pay dividends.

Top 10 Holdings (73.68%)

iShares Core MSCI Canadian Quality Dividend Index ETF (XDIV)

This ETF seeks to replicate, net of expenses, the performance of the MSCI Canada High Dividend Yield 10% Security Capped Index. The MSCI Canada High Dividend Yield 10% Security Capped Index targets companies from the Parent Index (excluding REITs) with high dividend income and quality characteristics and includes companies that have higher than average dividend yields that are expected to be both sustainable and persistent.

Top 10 Holdings (77.75%)

Conclusions

For your convenience, I’ve re-displayed the summary stats below:

NameBMO Canadian Dividend ETFiShares S&P/TSX Canadian Dividend Aristocrats Index ETFiShares Canadian Select Dividend Index ETFVanguard FTSE Canadian High Dividend Yield Index ETFiShares Core MSCI Canadian Quality Dividend Index ETF
TickerZDVCDZXDVVDYXDIV
Expense Ratio0.35%0.60%0.50%0.20%0.10%
Yield5.57%5.24%5.71%5.17%5.26%
% Financials33.88%25.26%59.85%58.30%56.42%
% Energy15.25%9.64%6.30%30.00%17.72%
% Top 1030.00%19.95%58.37%73.68%77.75%

Judging by the sector exposures, XDV, VDY and XDIV provide more concentrated exposure to financials. VDY provides concentrated exposure to both financials and energy. If you desire an ETF more focused on financials and energy, VDY and XDIV are probably your best choice because of their exceptionally low fees.

The remaining dividend ETFs – ZDV and CDZ – provide a more diversified exposure to Canadian dividend paying stocks across a wider range of sectors. Although ZDV is a bit more concentrated in financials and energy, this provides it a yield boost. Finally, ZDV also charges a lower fee, making it my preferred ETF for broad exposure to a wide variety of Canadian dividend paying stocks.

Categories
Income Investing

May 2020 US Dividend Increases

Corporate executives have an ability to send ‘signals’ to the market about the health of their organization. One such signal is dividend policy.

In particular, if a company increases its dividend – particularly in a bad economic environment – it signals management’s confidence in the company’s future prospects. It also indicates the company has the cash to continue paying its dividend.

If I’m going to invest in a company right now, I want to know that the company’s executives are confident. While I wouldn’t rely on this single factor to make an investing decision, I believe it provides good corroborating evidence for an investing thesis that might already exist.

May of 2020 was one of the worst months ever for the US economy. Yet there are a handful of large cap US companies that are increasing their dividends, which I have listed below:

(Best viewed on desktop)

May Dividend Increases (US Companies with Market Cap >$10b)

CompanyTickerNew Div% RaiseYield
CloroxCLX$1.114.72%2.20%
MedtronicMDT$0.587.41%2.37%
ChubbCB$0.784.00%2.97%
NetEaseNTES$1.1613.73%1.17%
American TowerAMT$1.101.85%1.91%
Northrop GrummanNOC$1.459.85%1.77%
Koninklijke PhilipsPHG$0.962.74%2.10%
Cardinal HealthCAH$0.491.02%3.69%
Franco NevadaFNV$0.264.00%0.70%
Microchip TechnologyMCHP$0.370.14%1.72%
KKR & CoKKR$0.148.00%2.00%
Pembina PipelinePBA$0.151.89%7.93%
FactSet Research SystemsFDS$0.776.94%1.20%
Ameriprise FinancialAMP$1.047.22%3.87%
TE ConnectivityTEL$0.484.35%2.76%
Thomson ReutersTRI$0.3832.40%2.19%
Expeditors Intl of WashingtonEXPD$0.524.00%1.40%
Baxter IntlBAX$0.2511.36%1.11%
PepsiCoPEP$1.027.07%3.11%
Categories
ETFs and Funds Income Investing Investing

3 Canadian Preferred Share ETFs for Steady Income

I’ve met many people over the years who love their dividend stocks. They buy Canadian staples like Royal Bank, TD, BCE and Enbridge for their consistent, growing (usually) dividends.

If you’re an income investor, there’s nothing wrong with this for the equity portion of your portfolio. But there’s a way to get the fixed income side working harder – by using preferred shares.

Preferred shares are hybrid securities that pay dividends (often fixed). Preferred share dividends must be paid out before common share dividends, making them a more reliable source of income.

In the event of a dissolution or liquidation of the issuer, preferred shareholders’ claims on assets are senior to common shareholders but behind debt holders.

The share price of preferred shares can change significantly but tends to be more stable than common equities. This is a positive and a negative, depending on how you look at it. Preferred shares don’t participate in the upside profits from ownership of the company and usually have no voting rights unlike common shares. However, they might decline less than common equities from the same issuer in down markets.

Because preferred shares are often redeemable at a specified par value and pay a fixed dividend, they can have similar characteristics to bonds. Namely, they are more interest rate sensitive than common shares. Because of this, at times the prices of preferred shares can move in different directions to their common stock counterparts.

A big benefit over corporate bonds for Canadian investors using non-registered accounts is certain Canadian preferred shares are eligible for the dividend tax credit. (I.e. a 5% yield on an eligible Canadian preferred share is worth more after tax than 5% on a similar bond.) Another advantage over bonds is the higher pre-tax yield. Of course, this is because bonds are ranked higher in a company’s capital structure and tend to be less volatile.

As you can see, preferred shares are an asset class that belongs somewhere between stocks and bonds. As such, they can be used to fine tune a portfolio potentially replacing some of the equity or corporate bond portion, depending on an investor’s individual situation.

Warning: Over the long-run you’d probably be better off NOT using preferred shares as an equity substitute. They don’t participate in the upside – that’s a big tradeoff for an investor with a long time horizon.

There is a lot to look for when buying individual preferred shares:

  • Credit quality
  • Yield to call/redemption
  • Liquidity
  • Term to maturity – perpetual vs retractable
  • Payment provisions – fixed, floating, re-settable
  • Dividend policy – cumulative vs. non-cumulative
  • Other features

Ideally, a portfolio of preferred shares is diversified by issuer and type. Quite frankly the dumb/lazy investor like myself has no time or energy for this kind of research and maintenance. Instead, I prefer to use an ETF.

Below I’ve listed 3 of the largest preferred share ETFs that are traded on the TSX:

iShares S&P/TSX Canadian Preferred Share ETF (CPD)

This ETF provides exposure to a diversified portfolio of Canadian preferred shares and can be used to diversify sources of income beyond traditional government bonds and GICs.

Key facts (as at May 25, 2020):

  • Yield: 6.05% (trailing 12mth distribution yield)
  • Distribution Frequency: Monthly
  • Top 3 Sectors: Banks (35.83%), Insurance (20.98%), Energy (15.67%)
  • Management Fee: 0.45%

RBC Canadian Preferred Share ETF (RPF)

This ETF provides access to a diversified portfolio of rate-reset preferreds in a single ETF. The ETF is actively managed by investment teams with expertise in company-level fundamental research, credit analysis and interest rate forecasting.

Key Facts (as at May 25, 2020):

  • Yield: 6.81% (dividend yield)
  • Distribution Frequency: Monthly
  • Top 3 Sectors: Financials (59.70%), Energy (22.60%), Utilities (14.80%)
  • Management Fee: 0.53%

BMO Laddered Preferred Share Index ETF (ZPR)

This ETF is designed for investors looking for higher income from their portfolios. The ETF invests in a diversified portfolio of rate reset preferred shares and has lower interest rate sensitivity than the full preferred share market.

Key Facts (as at May 15, 2020):

  • Yield: 6.81% (distribution yield)
  • Distribution Frequency: Monthly
  • Top 3 Sectors (May 25, 2020): Diversified Banks (39.17%), Oil & Gas Storage and Transportation (21.43%), Life & Health Insurance (7.53%)
  • Management Fee: 0.45%
Categories
Income Investing Investing

40 S&P 500 Companies Raised Dividends During the Covid-19 Crisis

Note: Table below best viewed on desktop PC

If you’ve watched CNBC lately all you see is doom and gloom. If it bleeds it leads, so naturally media has a bias to publish scary stories. And there have been plenty over the past couple months.

Many of these recent stories included high profile dividend cuts at companies with big brand names: American Airlines, Expedia, Southwest Airlines, Walt Disney Company, Estee Lauder, General Motors, Hilton Worldwide, Boeing, Ford, Macy’s, Gap, Nordstrom…just to name several.

This is enough to make a dividend investor want to wait it out on the sidelines.

Despite the negative news about dividend cuts, the number of positive (increases) and negative (suspensions and decreases) dividend actions is surprisingly balanced.

The negative actions make sense and there are undoubtedly more cuts to come. But the increases?

Put yourself into a corporate executive’s shoes. The economic shit-storm is no longer a surprise to any executive choosing whether or not to pay dividends. Many corporate executives now have enough information to determine whether their company can continue to pay – or even raise – dividends. So many companies are indeed in a position to raise dividends.

Consequently, since March 1st 40 companies in the S&P 500 have voluntarily chosen to INCREASE their dividends. Some by significant amounts.

For those relying on a dividend for retirement or investment income, a dividend suspension can be quite a shock. However, if you’ve been following my suggestions you are properly diversified and fairly insulated from the negative shock from a single holding or sector.

In fact, if you’ve been following my articles (Could Covid-19 Trigger a 2008-Style Financial Crisis – February 26, 2020) you might have avoided the crisis altogether.

But that’s in the past. Like the executives leading these corporations, what you need to do now is think about the future. Executives typically don’t raise dividends when the see a dark future for their company.

Which companies increased dividends? Below I’ve listed them in order of % dividend increase. The average increase was 7.44%, ranging from 0.36% to 78.57%. Personally, I think any company raising dividends by 5% or more in this environment has to be pretty confident about the future.

Note that one company initiated dividends in May (Otis Worldwide Corp).

Company NameTimingTickerNew RateOld RateChange %SECTOR
Otis Worldwide CorporationMAYOTIS$0.80$0.00n/aIndustrials
Newmont CorporationAPRNEM$1.00$0.5678.57%Materials
Dollar General CorporationMARDG$1.44$1.2812.50%Consumer Discretionary
Progressive CorporationMARPGR$2.81$2.5111.95%Financials
Ross Stores, Inc.MARROST$1.14$1.0211.76%Consumer Discretionary
Baxter International Inc.MAYBAX$0.98$0.8811.36%Health Care
American Water Works Company,APRAWK2.202.0010.00%Utilities
Globe Life Inc.MARGL$0.75$0.698.70%Financials
General Dynamics CorporationMARGD$4.40$4.087.84%Industrials
Costco Wholesale CorporationAPRCOST$2.80$2.607.69%Consumer Staples
American Tower CorporationMARAMT$4.35$4.047.67%Real Estate
CME Group Inc. Class AMARCME$5.90$5.507.27%Financials
Ameriprise Financial, Inc.MAYAMP$4.16$3.887.22%Financials
PepsiCo, Inc.MAYPEP$4.09$3.827.07%Consumer Staples
Apple Inc.APRAAPL$3.28$3.086.49%Information Technology
Johnson & JohnsonAPRJNJ$4.04$3.806.32%Health Care
Equity ResidentialMAREQR$2.41$2.276.17%Real Estate
Procter & Gamble CompanyAPRPG$3.16$2.986.04%Consumer Staples
First Republic BankAPRFRC$0.80$0.765.26%Financials
Kohl’s CorporationMARKSS$2.82$2.685.22%Consumer Discretionary
UDR, Inc.MARUDR$1.44$1.375.11%Real Estate
Kinder Morgan Inc Class PAPRKMI$1.05$1.005.00%Energy
Citizens Financial Group, Inc.APRCFG$1.50$1.434.90%Financials
QUALCOMM IncorporatedAPRQCOM$2.60$2.484.84%Information Technology
Applied Materials, Inc.MARAMAT$0.88$0.844.76%Information Technology
MetLife, Inc.APRMET1.841.764.55%Financials
TE Connectivity Ltd.MAYTEL$1.92$1.844.35%Information Technology
Nasdaq, Inc.APRNDAQ$1.96$1.884.26%Financials
Expeditors International of WaMAYEXPD$1.04$1.004.00%Industrials
Travelers Companies, Inc.APRTRV$3.40$3.283.66%Financials
Cboe Global Markets IncMAYCBOE$1.44$1.393.60%Financials
Southern CompanyAPRSO$2.56$2.483.23%Utilities
Xilinx, Inc.APRXLNX$1.52$1.482.70%Information Technology
Colgate-Palmolive CompanyMARCL$1.76$1.722.33%Consumer Staples
American Tower CorporationAPRAMT$4.45$4.352.30%Real Estate
Norfolk Southern CorporationAPRNSC3.763.682.17%Industrials
People’s United Financial, IncAPRPBCT$0.72$0.711.41%Financials
Cardinal Health, Inc.MAYCAH$1.94$1.921.04%Health Care
International Business MachineAPRIBM$6.52$6.480.62%Information Technology
Realty Income CorporationMARO$2.80$2.790.36%Real Estate
Categories
Investing

US Companies That Actually Raised Dividends Last Month

Corporate executives have an ability to send ‘signals’ to the market about the health of their organization. One such signal is dividend policy.

In particular, if a company increases its dividend – particularly in a bad economic environment – it signals management’s confidence in the company’s future prospects. It also indicates the company has the cash to continue paying its dividend.

If I’m going to invest in a company right now, I want to know that the company’s executives are confident. While I wouldn’t rely on this single factor to make an investing decision, I believe it provides good corroborating evidence for an investing thesis that might already exist.

April of 2020 was one of the worst months ever for the US economy. Yet there are a handful of large cap US companies that are increasing their dividends, which I have listed below:

(Best viewed on desktop)

April 2020 Dividend Increase Announcements
CompanyPreviousNewYield
Apple$0.77$0.821.12%
American Water Works$0.50$0.551.80%
Cheniere Energy Partners$0.63$0.647.60%
IBM$1.62$1.635.16%
Metlife$0.44$0.465.23%
Kinder Morgan$0.25$0.267.16%
Xilinx$0.37$0.381.68%
Newmont Goldcorp$0.14$0.250.90%
Nasdaq$0.47$0.491.86%
Travelers Companies$0.82$0.853.34%
Qualcomm$0.62$0.653.58%
Southern$0.62$0.644.61%
Costco Wholesale$0.65$0.700.90%
First Republic Bank$0.19$0.200.86%
Procter & Gamble$0.75$0.792.61%
Johnson & Johnson$0.95$1.012.89%
Categories
ETFs and Funds Investing

How to Pick Dividend Stocks

Theoretical purists will hate this, but I love dividend stocks. I know total returns are what really matter in the end, but I truly appreciate the discipline forced on executives managing a dividend paying company. As an added bonus, there are also psychological benefits to owning dividend paying stocks.

Executives at dividend paying companies don’t want to cut their dividend. Consequently, they work harder to preserve and grow cash flow. They also are more likely to return excess cash to shareholders instead of spending it on pet projects and empire-building. I believe dividends enforce a level of discipline on corporate executives.

I believe dividends enforce a level of discipline on corporate executives.

Moreover, a tangible, growing cash return provides a psychological buffer to the unpredictable ups-and-downs of the stock market. An investor that believes he will continuously receive his dividends will be less likely to make emotional sell decisions when things get difficult. Things are difficult right now.

During the Covid-19 coronavirus crisis, stock prices have plummeted. As stock prices plummet dividend yields have exploded. (Dividend yield = $ dividend per share / share price) This has attracted the interest of many investors that read this blog.

Just look at the sexy dividends in the table below (as at April 1, 2020). But beware – high dividend yields are sometimes like a siren’s call, attracting yield-chasers to their doom.

CompanyDividend Yield
IBM6.01%
3M4.42%
TD Bank5.83%
Altria Group8.95%

While on the surface a high dividend yield can look appealing, there is much more that needs to be considered.

Dividends are not guaranteed. They can be reduced or even eliminated. It has happened many times and will continue to happen in the future.

Broadly-speaking, Goldman Sachs is predicting the aggregate of dividends paid by companies in the S&P 500 will decline in 2020. According to US equity strategists at Goldman Sachs, S&P 500 dividends will decline by 25% in 2020 compared to 2019. Since dividends have already risen so far this year by 9%, that implies between now and the end of the year, dividends will decline by 38%.

The market collapse is barely a month old and we’re already witnessing numerous dividend cuts and suspensions. Here are just a few:

  1. Boeing: Dividend suspension
  2. Marriott International: Dividend suspension
  3. Ford: Dividend suspension
  4. Delta Airlines: Dividend suspension
  5. Freeport-McMoran: Dividend suspension
  6. Darden Restaurants: Dividend suspension
  7. Bloomin’ Brands: Dividend suspension
  8. BJ’s Restaurants: Dividend suspension
  9. Macy’s: Dividend suspension
  10. Nordstrom: Dividend suspension
  11. A&W: Dividend suspension
  12. Occidental Petroleum: Dividend cut
  13. Apache: Dividend cut
  14. Targa Resources: Dividend cut
  15. DCP Midstream LP: Distribution cut
  16. Sabre: Dividend suspension

At the same time, there are other companies that have (more-or-less) publicly stated they will not cut their dividend. CIBC’s CEO, Victor Dodig, on March 31st made the following statement on BNN:

“Our goal is to make sure that those dividends are flowing…I’d say one thing that’s incredibly important: Canadian investors that invest in our banks rely on those dividends for income. And every source of reliable income that we can provide to Canadians – and Americans, and our other shareholders that are investing in our banks – is incredibly important in this moment in time where cash flow reduces anxiety.”

So how are you supposed to know a dividend is secure?

You don’t.

Dividends – like price returns – must be viewed as uncertain. The likelihood of a future dividend exists on a scale of probabilities. Some are less likely to continue, others are more likely. Fortunately, there are ways to help identify dividends that are more likely to be paid in the future.

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Use history as your guide

Some companies have paid dividends for decades. In the US, “Dividend Kings” are companies that have consistently paid their dividends for over 50 years. Here’s a recent list of these companies.

Management at companies with a long history of paying dividends are more likely to do everything they can to protect the dividend. 1) No CEO wants to be the one to break a multi-decade track record. 2) After decades of protecting the dividend, shareholder cashflow management becomes part of the corporate culture and design. 3) A company that has consistently paid a dividend throughout previous crises is likely in an industry with relatively steady demand and predictable margins (compared to other industries).

Avoid dying industries

You could own shares of the best run company with a management team committed to paying a dividend, but if that company is in a deteriorating industry the dividend still might get cut. Remember record companies, newspapers and magazines?

You could own shares of the best run company with a management team committed to paying a dividend, but if that company is in a deteriorating industry the dividend still might get cut.

The challenge is that many companies in industries with a potentially big future (e.g. Tesla) don’t pay dividends. Companies in these industries might be growing fast, but they don’t yet have a stable source of cashflow. Instead, most dividend investors focus on are mature industries that will continue to stand the test of time – telecommunications, consumer non-discretionary, utilities, banks.

You’ll notice I didn’t include the energy industry. While this industry is mature and critical to the economy, it is highly cyclical and subject to the whims of the commodities markets. While there may be a place for energy companies within a dividend portfolio, I would consider these to be at the riskier end of the spectrum.

Find companies with cash to pay their dividends

When choosing dividend stocks, pick companies that can actually pay their dividends. This sounds like common sense, but when the high-yield sirens call many forget this.

Unlike many other items on financial statements, dividends aren’t some kind of accrued line-item. To pay a cash dividend a company must actually have cash. For a dividend to be sustainable, that cash must come from earnings. (Believe it or not, many companies finance their dividend payments by borrowing money.)

    While I wouldn’t expect anyone to trace the origins of where a cash dividend came from, a simple measure can provide some guidance. The dividend payout ratio (annual dividend per share / annual earnings per share) indicates the proportion of earnings paid out as dividend. While companies in more stable industries can handle higher payout ratios, generally a payout ratio below 50% of earnings is very comforting to me.

    Who is competing for your cash?

    Stockholders get paid last. They receive the remnants of cash left over after interest payments on debt. Technically-speaking, debt is higher on the capital structure than equity. This means stockholders don’t get paid their dividends until after bondholders have received their coupons.

    For this reason, when investing in a dividend paying stock you need to understand how debt affects a company’s cashflows. Conveniently, the dividend payout ratio somewhat bakes this into the calculation, since earnings per share shows what’s left after debtholders have been paid.

    Still, it helps to understand how indebted the company is. This requires a bit of homework, but dividend investors should pay attention to a company’s debt-to-assets and interest coverage ratios. A heavily indebted company – especially one in a cyclical industry – will have a much harder time committing to dividend payments.

    Yes, I have a life and day job

    I don’t have hours a day to dive into company financials. The most prudent way to proceed is to assume at least some investments will at some point cut or suspend their dividends. (Mitigating unavoidable mistakes is part of the entire premise of DumbWealth.com.) My simple workaround is, within the equity portion of my portfolio, to diversify by spreading a portfolio across 20-30 dividend paying stocks and a range of industries.

    This can be done by purchasing individual stocks or by buying an ETF that invests in dividend paying stocks.

    Personally, for my long-term buy-and-hold investments I prefer to own the actual stocks. That way I avoid any perpetual fees associated with an ETF. However, this strategy would not make sense if my portfolio was small (say less than $20-30k) or if I had a shorter time horizon.

    Please let me know below if you have any questions!

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    Categories
    Investing

    Current Bear Market vs Past 2 Bear Markets

    The stock market is in the crapper. Today alone (March 12, 2020) the S&P 500 fell by 10%. That was the second worst day since 1987.

    The market is down about 25% from it’s highs. Believe it or not, the market’s all time high was about a month ago.

    How far will this go?

    I compared the current bear market to the previous two bear markets in 2000-2002 and 2007-2009. As you can see in the chart below, the current bear market (to March 12, 2020) is only about half the depth of the previous two.

    Also, the speed of the current decline is blindingly fast compared to the previous two bear markets. During the last two bear markets it took about 250 days to decline as far as we’ve declined in just 18 days.

    It’s quite unbelievable. The current decline is closer in speed to the crash that happened after the Lehman collapse – which occurred in the middle of the 2007-2009 bear market.

    Given the severity of the coronavirus impact to the real economy, the current bear market might only be half finished. The news flow continues to worsen. Still, over the past couple days I have started to pick away at a number of dividend paying stocks (like RY, TD, BCE, IBM, MMM to name a few). Because you never really know when it’s over.

    I look at it like I’m trading my capital for a permanent and growing stream of income. Yields on some dividend-growers are around 5-6%. Even if the current yield was my only source of return I’d be reasonably happy. However, the stocks I’m buying should continue to grow their dividend over time, raising the yield on my initial investment.

    I’m probably early and the market will continue to decline. As the market declines I’ll continue to buy more. The lower it goes, the more aggressive I’ll get. That means at some point I’ll start shifting my purchases to some of the big tech names that don’t necessarily pay dividends.

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    Categories
    Investing

    The Dividend Collector

    Simply put, investing is all about buying a series of cash flows. More comprehensively, the value of a stock should equate to the present value of all future cash flows to equity-holders using a discount rate that accounts for time and risk.

    Typically, an investor would estimate the future cash flows and work backwards to determine an appropriate price for the stock. If the stock is trading below the estimated value, the investor would buy with the expectation the price would eventually reach its fair value. Longer term investors might continue to hold a stock – even if it’s trading at fair value – because they expect to receive a return on their investment.

    The problem with the traditional way of evaluating a stock is that price fluctuations can take investors on an emotional roller coaster, leading them to make bad decisions.

    Below I present an alternative, somewhat backwards – but otherwise appealing – way to look at a stock by solely looking at the dividends received.

    This way to look at a stock is as if you were buying an annuity (from an insurance company) that pays growing cash distributions. While you still own the original capital (and any capital appreciation), which you wouldn’t with an insurance annuity, the key to this analytical approach is to assume you don’t. Essentially, you trade a lump sum today for an infinitely continuous and growing stream of dividends.

    Becoming a dividend collector

    I think this psychological ploy can help some investors avoid over-trading their accounts by ignoring price fluctuations, instead focusing on dividend income generated by the portfolio. Dividend streams tend to be more stable than stock prices, resulting in less emotional distress. This is because even during bear markets, many companies will continue to pay and even grow their dividends. The dividend collector is far less emotionally sensitive to market movements than the traditional portfolio manager. The dividend collector is also more likely to remain invested for the long term, thus creating greater wealth than someone who trades on emotion.

    The investing purists will say that total returns (price fluctuations + dividend income) is what matters. I agree. In the end, you’ll be collecting and reinvesting dividends plus (hopefully) growing your initial investment over time. That’s the beauty though. By ignoring your original capital investment and focusing solely on the dividend stream, any growth in capital becomes a fabulous added bonus at the end of your investment horizon.

    Today’s small dividend becomes tomorrow’s big dividend

    For simplicity’s sake, assume an initial investment of $100 into a dividend paying stock. Assume the annual dividend on that stock is $2.50, but grows at 6% annually.

    (Note: In reality you wouldn’t invest in just one stock. To reduce risk, you’d diversify across a number of dividend paying stocks and research the quality of each of those dividends.)

    The chart below illustrates how that annual dividend would rise each year over 20 years.

    As the $2.50 dividend grows to $8.02 over 20 years, an initial 2.5% dividend yield today becomes an 8.02% dividend yield based on your original investment.

    An investment that pays for itself

    Giving up some money today in exchange for an escalating cash payment sounds appealing. But you also have to consider how that money accumulates over that 20 years. Over that period you’ve collected almost $100 worth of dividends ($99.98 to be precise). So you’ve recouped your original investment – presumably to put to work in another asset – and you’re continuing to generate 8.02% on your original investment.

    Now take that experience and scale it up to a $1,000,000 fully diversified portfolio of dividend stocks. Under the same assumption, that portfolio has generated almost another million over 20 years plus eventually spits out an income of $80,200 that continues to grow. Realistically though, you’ve also reinvested the accumulated dividends (thus generating additional dividend income) plus your portfolio has likely grown (the added bonus I mentioned above).

    Again, I want to stress this isn’t necessarily an academically complete way of looking at an investment. However, I find that focusing on the continuous and growing stream of cash flows generated by an investment helps some people stick to a long-term plan. Consequently, they are better equipped to grow wealth over the long term and avoid emotional sell/buy decisions along the way.

    Categories
    Wealth

    How to Generate Retirement Income

    Picture this. It’s September 1981 and you’ve just retired. You want to live a comfortable life so you figure you need to generate a retirement income of about $50,000 in today’s (2019) dollars.

    That means you need $18,172.17 in 1981 (chart below).

    Inflation-adjusted income required to match a $50k income in today’s dollars.

    How do you proceed to generate a sustainable retirement income from your investments?

    In 1981 the solution was pretty simple and low-risk. You could buy and hold 10 year US Treasury bonds that, at the time, yielded over 15%. Investment required: $118,587.78!

    Of course, $118k in 1981 is worth more than $118k today because of inflation. In today’s inflation-adjusted terms (adjusting for Consumer Price Index) that’s the equivalent to $326,289.62.

    Unfortunately, for those retiring today, this retirement income strategy is totally infeasible. This is because the yield on 10 year US Treasury bonds has dramatically declined.

    The chart below shows how the 10 year US Treasury yield has declined over the decades. Currently the yield is flirting with all time lows of about 1.5%. These lower yields mean that an investment in US Treasury bonds doesn’t generate the income it used to. Said differently, to generate the required $50,000 annual income today using low-risk US Treasuries, you’d need to invest way more money than you would need to in 1981.

    10 year US Treasury Bond Yield

    As of September 1, 2019 you’d need to invest almost $3.5 million (chart below) into 10 year US Treasury Bonds to generate a $50,000 annual income. In inflation-adjusted terms, that’s about 10x more than you’d have to invest in 1981.

    (Final chart below shows inflation-adjusted investment required to generate the inflation-adjusted equivalent to $50,000 in today’s income.)

    Investment in 10 year US Treasuries to generate $50k (in today’s dollars).
    Inflation-adjusted investment in 10 year US Treasuries to generate $50k (in today’s dollars).

    With Yields So Low, How Can you Generate Retirement Income?

    Now you’re probably thinking you wouldn’t rely on just your straight investment income to pay for retirement. You might intend to draw down your capital and rely on a pension. This is what most people do. But I would argue it is not the right strategy.

    If you have a good defined benefit (DB) plan pension that replaces at least half your current income, God bless you. You can probably stop reading…that is, unless you think your company has even the slightest risk of going bankrupt sometime between now and the time you die or if you think your company will find a way to weasel out of paying its obligations (because with lower yields it is becoming increasingly difficult for defined benefit plans to remain fully-funded).

    On second thought, keep reading even if you have a DB plan.

    The Retirement Income Rule of Thumb

    The wealthy of the world strive to pay their retirement bills from their returns ON capital…not the return OF capital. In order to build lasting, generational wealth, enough income must be generated from a combination of dividends, interest income and capital gains to cover living expenses.

    You may be familiar with the 4% rule of thumb. This rule states that – based on historical market returns – an investor can withdraw up to 4% from their portfolio each year without eroding their capital. In essence, the 4% withdrawal is offset by returns from a combination of dividends, interest income and capital gains that equals to 4% or more.

    Generating a satisfactory income aligned with the 4% rule while maintaining a high degree of safety was easily achievable in 1981 – US Treasuries are considered risk free assets. Today, however, the environment is far more challenging.

    How do you generate sustainable income from your investment portfolio today? Unfortunately, you might not like the answer.

    You can do some or all of the following:

    1. Learn to live with a lower retirement income by living more frugally.
    2. Work longer and delay withdrawing from your portfolio. This allows your portfolio to grow larger and reduces the income-generation burden on your portfolio and the risk you outlive your savings (i.e. longevity risk).
    3. Build a larger portfolio by earning more income and saving a greater proportion of that income throughout your working life.
    4. Take greater risks with your money by investing in assets with higher total returns potential (combination of dividends, interest income and capital gains). The downside is that you might lose more money than you’re comfortable with if things go south.

    Of course, you can avoid all this if you have $3.5 million to invest in 10 year US Treasury Bonds. Without $3.5 million to invest in risk-free assets, you must stretch across the risk spectrum to find assets with higher dividend yields, higher interest income and greater capital returns potential. Of course, moving up the returns spectrum requires you to take on more risk.

    Beware of Risk

    Whatever you do, don’t go chasing higher returns without paying attention to risk. Same goes for higher yields. Not all yields are the same – for example, a company might have a high dividend yield because the market anticipates a dividend cut or worse. (When it comes to dividend yields, I always look at a company’s payout ratio to assess the sustainability of the dividend.)

    While you won’t be able to escape greater systematic risk (i.e. market risk) when investing in asset classes with higher total return potential, you can eliminate idiosyncratic risk (company-specific risk) by diversifying across companies. Moreover, systematic risk can be mitigated by investing in a variety of assets classes with low-or-negative correlations.

    Don’t make the mistake of ‘diversifying’ across asset classes with similar risk exposures – e.g. dividend paying stocks, corporate bonds, high yield bonds – and thinking you’re set. Many (probably most) asset classes are exposed to the business cycle and risk sentiment, so you need to find a way to balance out your risk exposure using assets that are negatively correlated to these factors, such as sovereign bonds and gold.

    But I just said US Treasuries yields are super-low, right? And gold is more of a currency than income-generating asset. True. This simply underscores today’s challenge with generating retirement income from a portfolio.

    Once you have to start worrying about risk, it becomes exponentially more difficult to generate retirement income using investments, like you might have in the past. It can be done – investing doesn’t need to be hard – but it’s not like 1981 where any monkey could fund their retirement without taking on risk or making lifestyle tradeoffs.

    Today, it is inescapable fact that you’ll need to do some combination of the four options noted above: 1) Live on less, 2) work longer, 3) save more, 4) take on more risk.

    See. I told you you won’t like the answer.