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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Categories
Wealth

The Rising Income Trap

Desire is a contract that you make with yourself to be unhappy until you get what you want.

Naval Ravikant

When I was finishing my undergrad (in 2001), I remember thinking a $40,000 salary was a ton of money.

While in school, I made minimal income yet somehow went out on a regular basis. I wasn’t suffering. In fact, that was a great period of time in my life. Still, I imagined the things I could do with a massive $40,000 income.

Soon after graduation, I was earning $42,000. I was rich! Or was I?

Fast forward to today. I couldn’t even imagine how I’d survive on a $42,000 salary.

Today, I earn quite a bit more than I did in 2001. Yet, I fight a constant battle to ensure I don’t fall into the rising income trap.

What do I mean?

Money has a way of vanishing. The more you earn, the more you spend. Expectations rise and you can easily find yourself inadvertently living paycheck to paycheck.

Make a dollar, spend a dollar

People are masters at rationalizing increased spending after their incomes go up:

“I make good money now so…”

“…why not turn the heat up a little higher.”
“…why not move to a bigger house.”
“…why not buy that leather jacket.”
“…why not get that $65,000 car.”

Quickly, all the extra money generated by a higher salary is eaten up by a new set of automatic monthly bills and discretionary expenditures. Some refer to this as ‘lifestyle inflation’.

Don’t let the Lexus fool you!

Despite appearances, many high earners are actually broke. In fact, many high earners live precariously close to the edge of bankruptcy because they are so dependent on their paychecks to cover their massive monthly fixed costs.

The true cost of graduating from a Ford to a Lexus is economic security and financial freedom. Financial freedom is only available to those who have money tucked away in savings accounts, investments, real estate and other assets.

As your pay rises you have the opportunity to use the surplus income to build lasting wealth. In contrast, by spending your surplus you are trapping yourself in a cycle of financial dependency. You are locked into a job you might hate because you need it to make your monthly mortgage payments. This is the rising income trap.

Retail therapy is bad for your financial health

It’s easy to get stuck in the rising income trap. Marketers exploit your primal instincts to desire more and have developed cognitive techniques to make shopping feel therapeutic.

The pressure doesn’t just come from marketers. Your boss wants you to be up to your eyeballs in debt. The less financial freedom you have, the more he or she owns you. Your friends want you to live paycheck to paycheck because they lack self control and feel better knowing everyone else is just as irresponsible. The system is simply built so you live hand-to-mouth in one way or another.

Stop. No matter what your income, I suggest you take a moment to look at all your expenses.

Are you spending to fulfill some unnecessary desire? Do the things you spend money on bring you happiness that lasts beyond a couple days?

The trappings of a consumerist society don’t lead to happiness. Keeping up with the Joneses doesn’t lead to happiness. Owning a bunch of stuff doesn’t lead to happiness.

It’s time to cut the crap from your life and start building some financial security so you can actually do what makes you happy.

When you get your next raise, calculate how much extra after tax dollars you’ll receive each paycheck. Allow yourself to keep 30% as money in your account and increase automatic debt repayments and investment account contributions to soak up the remaining 70%. Call your lender and financial advisor asking them to set this up. If it’s automated there’ll be less temptation to cheat because you’ll never see the money sitting in your account.

Do this for five or ten years (I know that sounds like a long time, but it’ll fly by and future you will thank you) and you’ll get a huge head start in building wealth and attaining financial freedom.

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Categories
Income Investing Investing

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

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Categories
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
Wealth

Chart: US Personal Incomes Actually Rose in April

Unemployment has skyrocketed. The economy has tanked. Yet personal income rose in April.

Personal income include all sources of income (including employment and government sources). So while wages fell due to rising unemployment, government benefits more than offset that decline resulting in the rise in personal incomes. Essentially, government benefits kept people (in aggregate) whole.

However, with lock-downs in place, expenditures (specifically consumption) dramatically slowed. As a result, the personal savings rate jumped to 32% in April!

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
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
Work

How to Not Get Fired While Working from Home

Day 40.

I still have a day job. None of my colleagues or staff have been laid off.

We’re the lucky ones. Even if you hate your job, be thankful for your paycheque.

Right now there’s an unspoken expectation that as long as everyone holds on tight things will go back to normal in a couple months. Back to daily coffee trips with the team. Back to conferences and staff meetings. Back to lunch in the foodcourt.

But I don’t think we’ll get back to normal. At least not anytime soon.

I know some of you would love to get packaged out of your job but – unless you’re set for retirement – now is not the time. You don’t want to enter a job market with a 30% unemployment rate. While you might be a rare unicorn, you also don’t want to start a business when 50% of existing small businesses are collapsing. Hey, if it came to it I’m sure you could make it work. But it would be more ideal to enter this situation after the economic shit-storm has passed.

Those of us lucky enough to be able to work from home might find ourselves in this predicament for much longer than originally expected.That means we need to virtually manage our careers.

The best case scenario for a vaccine is roughly 12-18 months. The reality is that vaccines for many viruses are extremely difficult to produce. For instance, in the mid-1980s some researchers thought they’d have an HIV vaccine within a couple years. No dice. It is possible that the hope for a vaccine is false, leaving treatment and social distancing as our remaining defences.

We can manage through this, but life might need to change for a while. Those of us lucky enough to be able to work from home might find ourselves in this predicament for much longer than originally expected. That means we need to virtually manage our careers.

It’s very easy to slip into the darkness when working from home.

While you might keep in regular contact with your primary network – your boss, your staff – people in your secondary network no longer run into you in hallways, meetings or elevators.

If you’re not great at spontaneous small talk, this is your time to shine.

Your secondary network includes people who have an indirect influence on your success or failure at an organization. They may be senior leaders or people in other teams. While in the office you might never really need to work with these people, they are reminded of your presence because of serendipitous encounters. These encounters are neither planned nor necessary, but they help to shape your personal brand in the office. That 30 second conversation in the elevator creates a lasting impression. We lose that when working from home.

If you’re not great at spontaneous small talk, this is your time to shine. With everyone stuck at home, we now must pre-plan and manufacture those serendipitous encounters. Very few do this, so it is a fairly easy way to stand out from the crowd.

It can be a challenge because it might feel forced. Personally, I think people say this because they don’t want to look like they’re trying too hard. This is where the art of relevance comes in. To manufacture serendipitous encounters, you need to create relevance. You don’t simply email the CEO to ask a random question.

Instead, here are some quarantine-friendly ideas for building your personal brand within your primary and secondary networks without coming across as a blatant ass-kisser:

Ask questions during conference calls.

Make sure people know you’re on the call and still work at the company by asking questions. Usually you know the agenda in advance so you can prepare a few before the call. Try not to sound stupid or like a shit-stirrer. Try to make your questions additive to the conversation.

You never know who might be on these calls. Imagine your next boss is on the call and you want to make a good impression. You do this by appearing engaged in the content and interested in using it to further the business.

Take initiative.

After a while of #quarantinelife, it’s easy to sit on your ass and wait for emailed requests to come in. Some eventually do, but as visibility fades and many of your colleagues disappear into the darkness new requests can slow to a trickle.

Use this to your advantage. Lead, don’t wait. Big or small, think of new tasks and projects and propose them to your boss(es). Better yet, think of an initiative that would benefit people in your secondary network and propose it to them.

Even if your ideas don’t all get executed, your initiative demonstrates that you’re not just sitting at home or in the park twiddling your thumbs. Show people that you can drive the business forward no matter where you are.

Book calls.

As unnecessary as many conference calls seem, they are a way of communicating “hey, I’m still here”. Participating in calls is one thing, but setting up calls makes people think you’re a mover and shaker. I know it’s bullshit, but corporate drones tend to believe meetings = progress. While in the regular face-to-face environment you can get away without setting up useless meetings, when working remotely you might have to suck it up and join the party.

Send updates.

Gone are the days of someone casually passing by your desk to see where something is at. Many will forget what you’re doing, some can’t be bothered to email you. Like I mentioned previously, others will have faded into the background and simply stopped caring.

If you want to remain relevant in this environment, let people know what you’re doing. Send updates to those who might be interested – your boss, stakeholders, clients, whoever. And when a task or project is completed stand on the rooftops and tell everyone about your amazing success. Yeah, many people don’t care a shit what you’re working on, but you’ll create the impression that you’re a producer. Indirectly, you’ll also be feeding your boss soundbites to use in his/her updates with his boss. Remember, there’s always a bigger fish.

Create solutions.

The new work paradigm comes with it’s own set of complexities. How do you interact with clients? How do you deliver content? How can employees collaborate remotely?

As these and other new challenges arise, instead of sitting back and letting your boss figure out workarounds and solutions why don’t you get off your ass and help? In some companies, you’ll be put on a pedestal if you know how to setup a meeting using Zoom. After 40 days, I’d hope most companies have already figured this out. But the longer this goes, the more unique challenges will arise.

Be the person that solves these new challenges and watch your personal stock price rise.

Final thoughts.

I hate to say it but we’re in some kind of economic depression right now. Income is super-valuable.

If and when the layoffs do sweep across the corporate world, you want to be last on the list (unless you don’t want to be last on the list…but I’ll save that discussion for another day).

It is very easy to lay off the person you barely know exists. It is very hard to lay off the person who you know and who contributes to the organization. In the current situation, many people will fit into category 1, simply because they’ve been treating this ‘work-from-home’ situation as a quasi-vacation.

It is easy to set yourself apart and show your value right now, so do it.

Free Guide: Surviving the Covid-19 Economic Crisis:

The Covid-19 economic crisis is gripping the world. After 20 years in the asset management business, it looks like we are fighting through unprecedented territory.

This is war. I created a 17 step, 47 page guide to help DumbWealth subscribers get through this.

I originally planned on printing the guide and selling copies for $20+. Instead I’m giving this away free because I think we all need to help each other during these difficult times.

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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    The Covid-19 economic crisis is gripping the world. After 20 years in the asset management business, it looks like we are fighting through unprecedented territory.

    This is war. I created a 17 step, 47 page guide to help DumbWealth subscribers get through this.

    I originally planned on printing the guide and selling copies for $20+. Instead I’m giving this away free because I think we all need to help each other during these difficult times.

    Categories
    Wealth

    You’re Richer Than You Think? City by City Median Income in Canada

    Feb 14, 2020 Update: I originally chose a sample of cities across Canada so not every single one is in the chart below. Due to popular request here is the data for Ottawa-Gatineau and Edmonton: Ottawa-Gatineau median salary is $40,128. 90th percentile is $97,713. Edmonton has a median income of $56,058. 90th percentile is $134,997.

    If you’re like me you probably compare yourself to the people within your industry or social group. In particular, you look at the people you admire as the benchmark for your own success.

    If you work in a high paying field like law or finance you are comparing yourself to a small elite group. This group is not representative of society in general. By comparing yourself to the upper echelon of society you likely feel like you are falling behind. However, even the worst paid surgeon makes more than most of the general population.

    Reality Check: How Does Your Income Actually Compare?

    I dug up some data on incomes in various Canadian cities, from Calgary to Victoria. I then calculated the 50th and 90th percentile incomes for each city for male workers. (The 50th percentile means 50% of the population is below that number. The 90th percentile means 90% of the population is below that number.)

    I displayed the data below for worker salaries in each city. As you can see, 50% of the working population in each Canadian city makes less than a fairly modest income. For example, 50% of workers in Halifax earn less than $40,000.

    My point: before worrying about how shitty you’re doing or how you are falling behind, take a look at how the rest of the population is faring. You may be surprised by your own relative success.

    Note 1: this data is from 2015 so the Alberta figures may have fallen since due to the challenges in the oil patch.

    Note 2: part time student and senior workers likely pull the data down, but this doesn’t change the point.

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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.