Income Investing

This Morning’s Dividend Declarations

Cincinnati Financial (NASDAQ:CINF) declares $0.63/share quarterly dividend, in line with previous: Forward yield 2.09%

bebe stores (OTC:BEBE) declares $0.06/share quarterly dividend, in line with previous: Forward yield 4.69%

Global Ship Lease (NYSE:GSL) declares $0.25/share quarterly dividend, more than double the $0.12 per Class A common share announced on January 12, 2021, as a result of subsequent fleet growth and success in rechartering: Forward yield 6.71%

WhiteHorse Finance (NASDAQ:WHF) declares $0.355/share quarterly dividend, in line with previous: Forward yield 9.13%

Viatris (NASDAQ:VTRS) declares $0.11/share quarterly dividend: Forward yield 3.13%

Income Investing Wealth

Dividend Growth vs Median Wage Growth

In case you haven’t been paying attention, most people are broke as fuck. The days of middle class growth and prosperity ended a generation ago.

Need proof? Look at real (real = adjusted for inflation) median household income in the United States. For years it was declining. Median real household incomes were flat from 1999 to 2016.

This seemingly simple measure is a driving force behind many of the recent societal shifts across America and much of the developed world. This is because while the economy has grown, the average Joe has been left behind. The wealth created by the overall economy didn’t simply evaporate – instead it went to a select few.

The 1%.

The owners of capital.

Labor has been shortchanged for a generation and people are looking for answers. This is precisely why far-left and far-right views are growing in popularity. Both wings of competing political parties offer radical solutions (and scapegoats) to their constituents who – driven by desperation – eat it up. The same situation has occured many times throughout history, often with tragic results.

Luckily, real median household incomes have started to improve. Still, the experience over the past 20 years has been horrible.

On average, despite a couple good recent years, real household incomes in America have grown by 0.53% each year this millennium! Compare that to average real GDP growth over the past 20 years of roughly 2% (which is already on the low side, historically).

Now compare real median household incomes and real GDP to real dividends paid by the S&P 500. The chart below shows real dividends per share for the S&P 500.

On its own this line doesn’t provide much information to evaluate against real household incomes or real GDP. The chart below, however, shows year-by-year growth in S&P 500 real dividends.

The average annual growth in real dividends this millennium: 5.14%.

5.14% vs 0.53% growth in real income growth (dividends vs. wages) is a massive difference. Especially if you compound this over 20 years as you can see below.

At 5.14% annual growth, $100 of annual dividend income grows to $272.

At 0.53% annual growth, $100 of annual wage income grows to $111.

That’s 145% more income for the person who derives their income from dividends. This clearly shows that the owners of capital (shareholders) have far outperformed the providers of labour (workers) over the past 20 years. And this doesn’t even count the capital gains on shares during the same period.

So who would you rather be?

This is the reason why many people have chosen to transition from providers of labour to owner of capital by saving and investing heavily. The aim is to accumulate enough capital to replace labour income with dividend income + capital growth. It’s the path many use escape the rat race.

Income Investing Investing

Stock Market Performance During the Great Depression

Many people point to the US stock market performance after the 1929 crash as evidence that stocks can go nowhere for decades.

The argument usually points to the chart below, which shows the Dow Jones Industrial Average failing to retake its August 1929 peak until November 1954. In other words, people make the argument that someone investing in US stocks at the 1929 peak would have had to wait until November 1954 just to break even.

This is false.

The above chart shows the commonly used Dow Jones Industrial Average – an index based on price-returns.

What people completely miss is that investors would have received dividend payments during this entire period. Below, I adjust market returns to include dividends.

According to the calculation below, when including reinvested dividends, an investment at the 1929 peak would have returned on average 5.58% per year ending November 1954. That’s equivalent to a cumulative total return of just under 300%.

While it’s true that the buy-and-hold investor would have ridden a financial rollercoaster along the way, even the worst market timer would have done OK if they simply invested a lump sum and did nothing.

Source: DQYDJ

Of course, it took time for dividends to compensate for price declines. It wasn’t until 1945 that investors started to experience a positive total return. That’s still a long time to wait – and still implicit evidence that stock markets can take a long time to recover.

However, the stagnation narrative is significantly undermined, as this shows it took far less than a quarter-century for the worst market timer to break even.

The above examples show a worst case scenario – someone who’s only decision was to invest at the peak of a stock market bubble and then sit on their hands. This isn’t a realistic scenario for most of us.

Most people invest periodically (i.e. not all at once) as they stash away savings over time. So the more realistic illustration would show how someone performed if they started investing in 1929 and added to their investment over time.

The following chart shows the portfolio value for someone who spread their investment over a 40 month period, starting at the end of 1929. In this example, the person invests a total of $20,000. As you can see, their account is positive (i.e. above $20,000) from the end of 1933 onward.

This more realistic scenario again shows the myth of secular stock market stagnation narrative is largely misleading.

Data from Robert Shiller
Income Investing

Manulife Investment Management on Dividend Growth Strategy

I follow a wide range of investing podcasts, journalists, pundits and more. When I come across one I think my readers would like, I share.

This recent podcast by Philip Petursson, Chief Investment Strategist, Manulife Investment Management, covers the dividend growth investing strategy.

As chief investment strategist and head of capital markets research, Philip has a range of investment strategy responsibilities, from market and economic analysis to investor education. He analyzes and interprets the economy and markets on behalf of Manulife Investment Management and works with the portfolio management teams to provide clients and investment intermediaries with guidance and commentary on strategies, and asset allocation weightings.

What happens when a dividend growth strategy is applied to exchange-traded funds (ETFs)? In this episode of Investments Unplugged, Brett Hryb, Head of Beta Management at Manulife Investment Management, joins host Philip Petursson to talk about this and related topics, including:

  • portfolio building and management
  • dividend payout ratios
  • blending active and passive investment strategies
  • what equity investors should consider.
Income Investing Investing

Canadian Natural Resources Increases Dividend by 11%

Canadian Natural Resources Limited (TSX: CNQ) (NYSE: CNQ) announces its Board of Directors has declared a quarterly cash dividend on its common shares of C$0.47 (forty-seven cents) per common share. The dividend will be payable on April 5, 2021 to shareholders of record at the close of business on March 19, 2021.

From CNQ’s recent Q4 2020 earnings announcement:

“The sustainability of our free cash flow generation provides the Board of Directors confidence to increase our dividend by 11% to $1.88 per share annually, marking the 21st consecutive year of dividend increases representing a CAGR of 20% since inception. The 2021 capital budget of approximately $3.2 billion drives targeted annual production growth of approximately 61,000 BOE/d, at the mid-point of our production range, from 2020 levels and robust free cash flow generation. At the current 2021 annual strip pricing of approximately US$57 WTI per barrel, the Company targets to generate significant annual free cash flow of approximately $4.9 billion to $5.4 billion, after our capital program and increased dividend. As a result, our balance sheet is targeted to strengthen further in 2021, with year end debt to adjusted EBITDA targeted to improve to approximately 1.2x and debt to book capitalization targeted to improve to approximately 29%, at the mid-point of the targeted free cash flow range. Subsequent to year end, in March 2021 the Board of Directors authorized management, subject to acceptance by the TSX, to repurchase shares under a Normal Course Issuer Bid (“NCIB”), equal to options exercised throughout the coming year, in order to eliminate dilution for shareholders. Our strong financial position, unique long life low decline asset base and effective and efficient operations continue to generate long-term shareholder value.”

Income Investing

S&P/TSX 60 Constituent Dividend Yields

I updated the data to March 4, 2021. The table includes forward dividend yield, p/e ratios, ex dividend dates, price to book and price to sales for all S&P/TSX 60 constituents.

Income Investing

30 Canadian Stocks That Raised Dividends in 2021

The relentless drum beat of quarterly dividend payments continues for many Canadian companies. Despite the challenging economic climate, many Canadian companies have actually increased dividends so far this year (2021). Many by a substantial amount.

Check out these 30 Canadian companies that have raised dividends so far in 2021 (as of the end of February):

Aecon Group (TSX:ARE) increased their quarterly dividend by $0.015, now up to $0.175/share. This represents a 9% increase. (Source)

ECN Capital (TSX:ECN) increases annual dividend from $0.10 to $0.12. (Source)

CCL Industries (TSX:CCL.B) increased their quarterly dividend from $0.18 to $0.21/share, up by 16.7%. (Source)

Quebecor (TSX:QBR.B) announced a 38% increase to its quarterly dividend, from $0.20 to $0.275/share. (Source)

Maple Leaf Foods Inc. (TSX: MFI) bumped up its quarterly dividend from $0.16 to $0.18/share, an increase of 12.5%. (Source)

Guardian Capital Group Limited (TSX: GCG; GCG.A) increases dividend by 13%. (Source)

Alamos Gold (TSX:AGI) increases dividend by 25% to $0.025 USD per quarter. (Source)

Stantec (TSX:STN) raised annualized dividend raised by 6.5%. (Source)

DREAM Unlimited Corp (TSX:DRM) increases quarterly dividend from $0.24 to $0.28 per annum. (Source)

Thomson Reuters (TSX: TRI) increased their annual dividend by $0.10, now up to $1.62 (US$). (Source)

Magna International (TSX:MG) bumped their quarterly dividend from $0.40 to $0.43/share, an 8% increase. (Source)

Newmont Corp (TSX:NGT) increases dividend by 38%. (Source)

TC Energy (TSX:TRP) increased their quarterly dividend by 7.4%, from $0.81 to $0.87/share. (Source)

Nutrien Ltd (TSX:NTR) increases dividend by 2% from $0.45 to $0.46 USD per quarter. (Source)

A&W Revenue Royalties Income Fund (TSE : AW.UN) monthly distribution rate will be increased from 10¢ per unit to 13.5¢ per unit beginning with the February distribution payable in March. (Source)

Brookfield Asset Management (TSX: BAM.A) bumped their quarterly dividend up to $0.13 (US$)/share, up by 8%. (Source)

Andrew Peller Limited (TSX:ADW.A) increases quarterly dividend by 5%. (Source)

FirstService (TSX:FSV) Declares 11% Increase to Quarterly Cash Dividend from $0.165 USD to $0.1825 USD per quarter. (Source)

Brookfield Renewable increases 5%. (Source)

BCE Inc. (TSX: BCE) announced a $0.17/share increase to its annual dividend, now sitting at $3.50 – a 5.1% increase. (Source)

Canaccord Genuity Group Inc (TSX:CF) increases dividend by 18% from $0.055 to $0.065 per quarter (Source)

Brookfield Infrastructure Partners (TSX: BIP.UN, BIPC) raises quarterly dividend by 5%. (Source)

Exco Technologies Ltd (TSX:XTC) Quarterly Dividend raised by 5.3%. (Source)

CN Railway (TSX: CNR) approved a quarterly dividend of $0.615/share, an increase of 7%. (Source)

Metro (TSE: MRU) bumped up its quarterly dividend from $0.225 to $0.25, an increase of 11.1%. (Source)

Richelieu Hardware (TSX:RCH ) increases Dividend by 4.9% to $0.07 for the first quarter of 2021 and payment of a special dividend of $0.0667. (Source)

ATCO Ltd (TSX:ACO.X) increases dividend by 3%. (Source)

Algoma Central Corporation (TSX: ALC), announced a quarterly dividend of $0.17/share. This represents a 31% increase from the previous quarter.

Urbana Corporation (TSX:URB) Increases Dividend By 12.5%. (Source)

Income Investing

The Irrelevance of Dividend Irrelevance

I recently had someone unsubscribe from this blog. That person was kind enough to let me know why – it was because I often endorse dividend growth investing.

This former-reader pointed to a behavioural bias called ‘mental accounting’ to demonstrate what they believe to be the flaw in dividend growth investing. Instead of separating returns into two forms – dividends + capital growth – this person argued that investors should focus on total returns. Moreover, by focusing on companies that pay growing dividends I am ignoring a large part of the market (e.g. the Teslas, Snowflakes of the world).

The funny thing is I actually agree with this person.

The ability to capture returns on a consistent, frequent basis helps many investors stay the course over the long run.

However, unlike the reader I believe that this behavioural ‘flaw’ is what helps dividend investors become BETTER long run investors.

The first thing people need to understand is investing is about what you take home at the end of the day. It’s about your personal returns on your account, relative to the risk you’re willing to take.

Most people start out believing they are ‘growth’ investors. That is, until they run into a bear market. Suddenly, they become ‘conservative’. People are allowed to change their minds. The problem is that these shifts create destructive financial behaviours.

In theory, the simplest, most efficient portfolio strategy might be to buy and hold a low-cost S&P 500 ETF. The problem is reality is messy.

In reality, the average investor dramatically underperforms the buy-and-hold S&P 500 portfolio over the long run. Why? Because they trade too frequently. They get excited after stock prices have run up (and buy) and then get scared after stocks have fallen (and sell). And then they sit in cash as the market rises again. Most investors buy HIGH and sell LOW.

I believe that dividend investing helps mitigate emotional trading. It is precisely because dividend investors separate their total returns into dividends + capital gains that keeps them from buying and selling on emotion.

I believe that dividend investing helps mitigate emotional trading.

Whether the markets are up or down, dividends still get paid. It is much easier to hang on to an investment if the positive reinforcement of dividends rewards you for doing so. Some refer to this phenomenon as ‘getting paid to wait’. In contrast, investors holding non-dividend paying stocks don’t receive that positive reinforcement.

The bottom line is that two similar investments might have the same expected total returns, but the characteristics of those returns have a significant impact on investor behaviour. The ability to capture returns on a consistent, frequent basis helps many investors stay the course over the long run.

Of course, this doesn’t apply to 100% of investors. Some investors will have better control over their emotions and have the intestinal fortitude to ride the big waves. It is entirely possible these investors beat the market over the long run. However, the empirical evidence suggests most investors are not in this category and require behaviour management.

Dividend Policy is Irrelevant? Yes and No.

Does this mean all companies should pay dividends? Definitely not. Dividend and stock buyback policy depends on the opportunities faced by the company.

Some argue that dividend policy is irrelevant to investors (because they can create ‘home made’ dividends by selling shares) and to the valuation of a firm (because they can raise capital if needed). This is technically true…in theory.

However, like all academic theories it comes with a lot of assumptions. A big one is that corporations have a better use for cash than their shareholders, and by paying dividends the company would be forced to raise debt or equity capital. This is why a company like Tesla doesn’t pay a dividend. The company believes it can earn a better return on invested capital than its shareholders. Clearly, this alone doesn’t make Tesla a good or bad investment.

Now, if Tesla couldn’t earn a high return on capital and still chose not to return cash to shareholders, you would have to question its motives. Many corporations hoard cash to build empires for their executives. A bigger empire = more executive pay. But it doesn’t necessarily mean greater shareholder returns.

Well managed mature companies return excess cash to shareholders. Well managed growth companies do not.

Over the long run every company eventually matures and must return cash to shareholders. For this reason, one might say that over the long run dividends are the ONLY thing that matter.

Income Investing Investing

Why I Abandoned High Yield Bonds

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Over the years, I have used high yield bonds as a hybrid asset class between stocks and higher grade bonds (like investment grade corporate bonds and US Treasuries).

Like stocks, high yield bonds benefit from improving business conditions, yet they rank higher on the capital structure because they are bonds. High yield bonds are issued by ‘below investment grade’ companies, and therefore pay higher coupons than investment grade corporate bonds because these companies come with a higher default risk. However, because of the higher coupons (and higher yield), high yield bonds have a lower duration (and are less interest rate sensitive) than lower-yielding bonds with a similar maturity.

Payments to bondholders typically take priority over stockholders – as a result, corporate bonds tend to be a less risky than the equity of the same company.

The Good Great

Believe it or not, high yield bonds have outperformed stocks from 1980-2019 with an average calendar year return of 15.10% vs 12.49%. Moreover, the worst calendar year performance (2008 for both) outperformed stocks by over 10 percentage points.

HY BondsInvestment-GradeStocks
Average Calendar Year Return15.10%7.81%12.49%
Worst Calendar Year Return-26.17%-2.92%-37.00%
Data source: High yield returns are represented by the Salomon Smith Barney High Yield Composite Index from 1980 through 2002, the Credit Suisse High Yield Index (DHY) from 2003 through 2013. From 2014 on, the S&P 500 Investment Grade Corporate Bond Index, and Federal Reserve Bank of St. Louis’ S&P 500 data were used.

Overall, the risk-return profile for high yield bonds has historically been quite favourable. After all, interest rates (as shown by the 10yr US Treasury yield in the chart below) have been in a bull market since around 1980. With this sort of tailwind, anything with a fixed coupon experienced long-term upward price pressure. This has been great for high yield bondholders.

The Bad

Looking at the chart below, one naturally has to wonder though if rates have bottomed for good. As I write this, the 10yr just moved above 1.3% for the first time since the pandemic began. With the firehose of fiscal and monetary stimulus expected to continue for the foreseeable future, it is likely yields continue to rise. I believe the Federal Reserve will allow the economy to run hot for a while before applying the brakes, so it is quite possible that both rates and inflation continue to creep higher.

While high yield bonds generally have a lower duration and benefit from an improving business environment, rising yields could put a damper on future returns expectations. At a minimum, I think it’s reasonable to argue that the capital gains are behind us, leaving only coupon clipping.

So why have I abandoned high yield bonds?

High yield bond yields have been pushed down to around 4%. As you can see in the chart below, this figure is historically low.

The following chart also shows yields on high yield bonds, but for a shorter time frame.

If high yield bonds are yielding a historically low 4% and rising interest rates act as a cap, at this point 4% is the best I can reasonably expect is for forward total returns on high yield bonds. I could be wrong, but given the information I have today I believe there are better alternatives.

You know what else yields about 4%? Royal Bank, Manulife Financial, TD Bank, Verizon and many other stocks out there. The kicker is that these companies will probably grow earnings and raise dividends over the years, flowing through a decent total return to shareholders. So at today’s cost, that 4% dividend yield could grow to a forward 5%, 7%, 10% yield on cost over several years. And as dividends grow, prices tend to follow. Try getting that kind of income stream and total returns profile from a bond.

So if the only remaining reason to hold onto high yield bonds is to collect the 4% yield, I’d rather move my money to dividend growth stocks. Consequently, I have sold all my high yield bond holdings and am redeploying into dividend growth stocks.

Income Investing

Today’s Investment is Your Ticket to the Next Decade’s Dividend

When people begin their journey into dividend investing, they frequently mistakenly focus on what they can earn today.

For example, a $100,000 portfolio invested in a diversified portfolio of dividend stocks with a yield of 3% will earn $3,000 per year. Dividend investors see this immediate income as the goal, and often stretch to find higher yielding stocks to boost their current income. What they fail to understand is their long term income goals are often at odds of their current income needs.

Remember: the dividend that is paid today will grow over time.

The S&P 500 dividend has grown on average 6.01% per year since 1989. If you exclude 2009 – a once in a lifetime financial crisis – during which the dividend on the S&P 500 fell by over 21%, the average annual growth rate is 6.89%.

The long term growth of dividends is the key consideration for dividend growth investors. If your time horizon to retirement is 20 years, you’re investing today for the dividend you expect to receive then. Because higher dividend yields often come with lower growth rates, it can be counterproductive to your future income to focus on generating income today.

If your time horizon to retirement is 20 years, you’re investing today for the dividend you expect to receive then.

Below I provide 3 hypothetical examples of portfolios generating 2%, 3% and 4% current dividend yield growing at 10%, 7% and 4% respectively. The growth rates differ because companies that pay out less in dividends generally can use capital for better purposes (i.e. growth). (Of course, this relationship is better represented by the dividend payout ratio, but for argument’s sake most companies with lower dividend yields tend to have lower dividend payout ratios.) The faster the company grows, the faster it is able to grow dividends. I then carry these assumptions forward over 20 years to see what income is generated at retirement.

As you can see, the lower current dividend/higher growth rate combo wins over the alternatives. In 20 years, this portfolio (assuming no additional investments) would earn $12,232. That’s 12.23% yield on original cost of $100,000. In reality, most people would be re-investing dividends along the way, growing the capital base on which more dividends are earned. But I’ll stick to a super-simple example.

The 3% portfolio ended up earning $10,850 per year in 20 years and the 4% portfolio $8,427. The 2% portfolio provides 30% greater income in 20 years! Why? Because it came with higher growth rates.

While today it might feel like a 2% yield is pointless for a dividend growth investor, over the long run that portfolio could potentially generate much greater annual income.

I look at dividend investing like I’m paying for something I will get in the future. When you invest for dividends, you’re really gaining a lower-cost entry point for the dividend that you expect to receive some time in the future. The longer your time horizon, the greater that dividend will be.

The thing is, to generate tomorrow’s income you need to invest today. Because the price for that income rises all the time. If the portfolio yield remains a constant 2%, the portfolio generating $12,232 in 20 years will then cost over $1.1 million.