Power of Dividend Growth 2009 edition

[Taggart]

2. Selling to rebalance doesn't make much economic sense for me. The only reason to sell for a dvg investor (in my plan) is a dividend cut, probable dividend cut, or elimination.

With the deep recession we're experiencing around the world, if a company has cut it's dividend, and it's financial statements still look OK, and I think when the economy gets better, that they may start increasing the dividend again, then I'll hang on to it.

3. More than 20 stocks in any one portfolio is too many. (This is a US problem. In Canada, it is difficult to find dividend stocks as noted above.)

I've got over 20 stocks in my portfolio, and over 40 Canadian dividend equities on my watch list.

4. Not all sectors have worthwhile dividend stocks.

I can find at least one dividend stock in eight of the ten sectors in Canada. The only ones, I can't find any, are Healthcare and Information Technology.

Then, supposing we used Vanguard's divisions (which seems simplest to me), would you try to keep equal current share values in each sector? Upthread, someone said yes, but what do others think? How often is it necessary to rebalance?

I don't have equal weight sectors, but what I've been doing recently is adding dividend stocks selling at reasonable prices to sectors where I'm underweight. What I don't do, is play the game of sector rotation, trying to guess which sectors will do best, in the forthcoming year.

[Sensei]

Hi,

Thanks, Tag. You are definitely a mentor around here.

With the deep recession we're experiencing around the world, if a company has cut it's dividend, and it's financial statements still look OK, and I think when the economy gets better, that they may start increasing the dividend again, then I'll hang on to it.

Well, there are exceptions to every rule. I intend to rebuild my US bank sector in the near future. I envisage three banks which I would feel really comfortable with:
BBT - which I own. It has not reduced its substantial dividend and raised recently.
WFC - still a good bank in my opinion (big cut recently)
USB - which I sold recently to replace the big dividend cut, but I will buy at $12 or less

I've got over 20 stocks in my portfolio, and over 40 Canadian dividend equities on my watch list.

I'm aiming for simplicity. The rest of my life is too busy and complicated to spend a lot of time on this. Low turnover is somewhat key. There are three or four stocks that I'd like to sell in my portfolio and three or four that I'd like to add, but after that, I don't envisage many changes. I'd say I have 80% of the stocks I'll ever want right now. Ideally I'd like to check in once per quarter. (Of course, I won't stop reading the business news and reading FWR between times.)

The only ones, I can't find any, are Healthcare and Information Technology.

Yup, but that is a pretty big hole relative to the US. I noted that no Canadian REIT really inspires me. (No Nortel or Biovail? )

I don't have equal weight sectors, but what I've been doing recently is adding dividend stocks selling at reasonable prices to sectors where I'm underweight.

That make sense for now. There are some compelling opportunities that should cause one to break from his own rules, and I have.

What I don't do, is play the game of sector rotation, trying to guess which sectors will do best, in the forthcoming year.

Well, if you mean stocks which you believe will appreciate in value the most, this shouldn't be important to us dvg investors. Dividend rate and sustainable growth are my obsessions.

[Sensei]

Hi,

I should never say never. I added a couple of trusts, one a REIT. I'm beginning to like Canada in this sector because many trusts pay monthly income. I added Keyera (KEY.UN) and Cominar (CUF.UN). I think found a livable balance between quality, meaningful rate (after tax), and sustainability with these trusts.

[Taggart]

WHY DIVIDENDS MATTER

This illustration shows what would have happened to a $1 million portfolio if it was invested on January 1, 2000 in a strategy with high current dividend yield combined with growth of dividends. The pro-forma returns were based on an actual client's performance before the deduction of fees (return from dividend and return from principal). All dividends were reinvested.This chart is for illustration purposes only to demonstrate the impact that rising dividends can have on total return over time, especially in a sideways market.

[BRIAN5000]

This may be worth a look from Taggart's link above. On their website.

Canadian Dividned strategy 2007-High Yield Low Payout Dividends

http://www.mhinvest.com/supportArticles ... rategy.pdf

From the same website...this is ugly 2007. I hope it won't happen with peffereds.

http://www.mhinvest.com/supportArticles ... estors.htm

[scomac]

As many of you are aware, today saw the release of yielder's quarterly Canadian dividend growth report.

For those who are unfamiliar with this report, it is a quantitative analysis that measures the attractiveness of select Canadian dividend payers by comparing their current yield to their historical range. Currently 35 of 47 stocks covered are cheap compared to historic high yields and an astounding 41 of 47 are viewed as cheap compared to historic average yields. This may sound like a compelling buy signal for a very large number of Canadian dividend growth stocks, but the results of this report have been relatively similar for many months now, in fact there are some stocks which have been "cheap" as long as Mike has put out these reports which for me has been ~6 years as a subscriber.

I guess the question that I'm asking is; just how valuable is this sort of historical data? What really brought this issue to light for me was mulling over Bill Gross' latest musings and the impact of deleveraging, credit contraction and the repricing of risk especially as it pertains to stocks. This is something that has been on my mind for a good 6 months now. I suppose the data would still be relevant provided that it covered a suitably long time period, but that is asking an awful lot of yielder to collect and maintain data that may run back in excess of 50 years. The next issue then becomes how does one account for some stocks having paid dividends for over a century while others -- CNR as an example -- have been public companies for less than 20 years? Surely that will impact the range of yields that a stock traded at due to the impacts of differing economic periods. With that in mind, about all one can do is keep the data set restricted to the time period that includes all of the constituents, yet this brings us squarely back to the first issue; just how relevant is recent historical data?

[sydney2]

A while back, someone posted a link to the dividendinvestor.ca, it was a terrific link but now when I click it on I get a message from google saying that "oops this link is broken". I tried the U.S. site and clicked on Canada but I was getting the same message.

[scomac]

This link works fine for me.

http://www.dividendinvestors.ca/

[JaydoubleU]

I guess the question that I'm asking is; just how valuable is this sort of historical data?

I copy Yielder's list every quarter for Q to Q comparison sake, but I don't rely on it. No offense, Yielder, but I think some of the data is inaccurate. For one thing, shouldn't the average yield of stocks be changing from quarter to quarter? You cannot say, for instance, that ENB has an historical average yield of 5.1% which is unchanged in 3 years. The fact is, is that ENB has yielded considerably less than 5.1% for the past few years, and so the lower yield should bring the average yield down, no?

Reading Bill Gross and reflecting on Yielder's dividend list we might also question whether a 7.3% yield from MFC really is "cheap," while a 5.1% yield from TRP (for example) is "expensive." If Gross is on the right track, then history is less important than the unfortunate reality that the dividend from TRP is probably not only safer, but it is more likely to grow in the next year or two. These cheaper, higher yields from the banks and insurance companies, etc. obviously come with a higher risk premium--the risk that eventually some of those dividends will be cut. The stock market has to turn around sharply for MFC to recover those earnings that made its former dividend growth superior. It seems possible that in the short term some recovery may be at hand, but what about Manulife's growth prospects over the coming decade? Again, I am assuming that Gross is correct and this time is different; we are not in a cyclical downturn but in a moment of historic change for markets, risk, and expected rates of return. Will the banks be able to return to their former dividend growth glory days? Many doubt it. Therefore a 4~5% yield from a relatively stable utility, growing at a more modest 5% or so annually, may be preferable to the instability of those higher yielders. Just look at what happened to RUS (Yielder's list says the dividend from RUS is not at risk, but it is). Can AGF.B be far behind? ENB, on the other hand, described as "expensive" on the list, recently raised its dividend by 10% and came out with strong forward guidance, even in the midst of a global recession. Isn't this worth a premium? To me, FTS and TRP are currently attractively priced, given the stability of their dividends and the regulated recession-resistant nature of their businesses.

Again, apologies to Yielder, and I do look forward every quarter to seeing the lists!

[Shakespeare]

It certainly seems to me that we could be seeing a repricing of the equity risk premium, in which case there may be a discontinuity in the yield data that, even if it's not permanent and another bubble develops some years in the future, may well be beyond the time frame of many of the 50-60 year olds on this board (bearing in mind that the amount we invest in equities should be decreasing as we age.)

In any case, past a certain age, low-yield stocks become increasingly unattractive as the investment time horizon shortens.

[JaydoubleU]

One further question. Why don't the lists include MBT, RCI.B, and SJR.B?

[Sensei]

As many of you are aware, today saw the release of yielder's quarterly Canadian dividend growth report.

For those who are unfamiliar with this report, it is a quantitative analysis that measures the attractiveness of select Canadian dividend payers by comparing their current yield to their historical range. Currently 35 of 47 stocks covered are cheap compared to historic high yields and an astounding 41 of 47 are viewed as cheap compared to historic average yields.

I admit I wasn't familiar with this list. I looked it over and there is a lot of useful information on the list. As far as 'cheap' goes, it shows that certain stocks are cheap if evaluated on the relationship between current yield and historical yield. That is certainly not the only way to evaluate a dividend stock. I agree with J., certain stocks like ENB, TRP, and FTS are also cheap if we evaluate them on their future dividend growth prospects and take into account risk.

As far as Bill Gross's musings go, delevering and re-regulation will be a significant factor in the dividend rate of any finanical stock going forward. Almost unconsciously, I've been selling banks in the US and the UK to the point of nothing in the UK, and two banks in the US, both with sell limit orders in place. I may begin nibbling again if the dividend yield creeps up to a stable 3% plus, but rebuilding my banks will be a long term process I fear.

I don't see de-globalization as a significant factor going forward and don't see it actually happening much beyond the short term. There are too many global companies that stand to profit from the globalization that has taken place to date.

[Sensei]

Hi,

I'm marking April 1st, 2009 as the official inception date of my dividend portfolio. Although I have no plans to retire, this date is also the beginning of my last 10 years of regular employment. I'd like to be able to say on April 1st, 2019 that I have enough dividend income + pension to live on.

I've been buying dividend stocks for over a year, I know, but I think the portfolios are 90% complete. My watch list is down to around 10 stocks none of which I feel are absolutely essential to my portfolios. Rebuilding the banks remains my fundamental challenge in the next 2-3 years.

I'm not planning on micro-managing any of my portfolios. The most important numbers I want to monitor are share price, yield on ACB, current yield, payout ration, dividend rate, rate increases, EPS, and FFO for REITs. For the most part, stocks already in my portfolios have passed some tests, like at least five years of dividend growth including this year. I've sold almost every dividend cutter except for RUS and a couple of US stocks that weren't worth selling cuz they went down so fast.

I plan to do a detailed check every quarter as well as monitor financial news as often as possible.

I'm only going to use three documents for each of three portfolios. One document will track monthly dividend income. A second document will track sector diversification based on the current share price. I will use this to add funds where it seems necessary. The third document is the holdings page from TDW which will show ACB vs current share price.

I intend to reinvest dividends and add new funds as they become available. However, I'd like to keep trading to a minimum, perhaps not more than 12 to 15 trades a year (although I've already done that many in 2009. )

Is it going to work out in real life? Comments welcome.

Cheers

[yielder]

I suppose the data would still be relevant provided that it covered a suitably long time period,

I don't think that it would. Companies change over time. The banks are a good example. Payout ratios have increased. They have moved from lending into brokerage, underwriting, mutual funds, and various other fee-based businesses. Thomson Reuters is another example having shifted from newspapers to electronic databases.

For companies with strong, stable earnings growth, historical data is extremely helpful if it covers a recession. I have been increasingly concerned about using historical data because the last recession was in the early 90s and we have seen 15 years of debt fueled growth. Additionally, there has been an incredible amount of yield chasing in dividend paying stocks since the dot.con bubble burst.

this brings us squarely back to the first issue; just how relevant is recent historical data?

Nonetheless, the best you can do is work with the data that you have. As you know, I've broken (temporarily, I hope) with the dividend-based investing approach that I've used for over 25 years because I thought that the risks that I saw in the financial system were disastrously high. I'm still mulling over the implications for dividend growth in an environment where we have no significant growth for years due to the flip side of deleveraging - savings and tighter credit.

No offense, Yielder, but I think some of the data is inaccurate. For one thing, shouldn't the average yield of stocks be changing from quarter to quarter?

If you calculate them that way. I don't. I use an average of the annual highest and lowest yield after adjusting for outliers. The recent report doesn't reflect 2007 or 2008 because I'm still chewing on whether to include them because of the fairly extreme distortions occuring. As an example, MFC has a 52 week high/low yield range of 11.5% and 2.5% both of which are outside the historical range. So far, I've decided to exclude this data.

As for the rest of your comments, they're all spot on, more or less. I say in the report and the distribution email that "This data is the start point for diligent research and interpretation. To use it mechanically without further research increases the risk of loss."

One further question. Why don't the lists include MBT, RCI.B, and SJR.B?

MBT because of the previous uncertainty around its becoming an income trust. It's dividend has been frozen for a number of years. Notwithstanding, it should probably be added. RCI.B has cut its dividend in 2000. It may be time to reconsider it. Up until 2003 SJR.B had no dividend to speak of and no dividend growth. When a dividend policy is initiated, I tend to wait about 5 years before adding it to the list. SJR.B will probably be added next report.

BTW, if you have questions about the report, you can always email me.

[2 yen]

Yielder....interesting comments re the banks. In a panic (hopefully a justified one) I sold my financials down to 10% of my portfolio. I am seriously considering not raising this percentage. Power, pipes and real estate make up most of my dividends now. The big issue is dividend growth to cover inflation. I guess if power, pipes and real estate grow enough to cover inflation, I'll be satisfied. Do you have any thoughts on the inflation issue in this new environment, i.e. will non-financials do the trick? Thanks.

[Taggart]

S&P ‘Dividend Aristocrats’ May Fall Below 40 as Payouts Are Cut

By Elizabeth Stanton

April 2 (Bloomberg) -- The aristocracy is under siege.

Standard & Poor’s annual list of companies that increased payouts for at least 25 years is in danger of falling below 40 for the first time since 1992 after slumping profits forced executives to conserve cash. General Electric Co., Gannett Co., Pfizer Inc., State Street Corp. and U.S. Bancorp, all in S&P’s Dividend Aristocrats Index, cut payouts this year.

[JaydoubleU]

I'm still mulling over the implications for dividend growth in an environment where we have no significant growth for years due to the flip side of deleveraging - savings and tighter credit.

Thanks for the reply, Yielder, and your explanations. I understand better what you are up to. The future of dividend growth is certainly a question that concerns me, as I've only recently moved to this investing strategy; needless to say, the timing wasn't spectacular But I have 10~20 more years to work with it, and I'm not willing to fold my cards just yet.

Ed Clark just commented that a dividend raise this year would be unlikely, although he said a cut was highly improbable. I think the sector as a whole is going to find it tough for the next several years. But there should be some dividend growth in other areas: the demand for electricity should soar when electric cars hit the market, and there'll be growth in the utilities (I believe). Communications is now a consumer staple, and there is potential growth here with new technology. Healthcare should continue to offer stability and growth as populations age.

I also agree with sensei that globalization isn't over. In fact, in many ways it has only just begun, and the recent global downturn highlights the extent to which we are all interconnected. There will be all sorts of opportunities for growth in developing markets that many NA and European companies can participate in and profit from. I still like the infrastructure side of GE, and DEO is a favorite, in more ways than just dividend growth All in all, I remain cautiously optimistic, but I will be focusing on the sectors where I see future growth, not the growth of the past.

[Sensei]

Hi,

If there is anything that the last 18 months has taught me, it is that I don't want to be selling off my portfolio to live. I have a very good imagination and read the news as much as anyone I guess. I can imagine how difficult it would be for someone who has just retired with the plan of SWing his/her funds or selling stocks for bread. Most retirement scenarios model portfolios in a rising market whose stocks are being reduced but the port value still goes up. Yet the opposite case of having to sell stocks in a market drop such as we have experienced and may still be experiencing could be near fatal for many and would have been for me.

I see the attraction of bonds and preferreds, but, for me, just not now. In my 10 year plan, five years from now is the logical time to start seriously building individual investments of this ilk. Dividend paying stocks are on sale NOW in my opinion. I would also note that the only positive and rising number in my financial life at the moment is dividend income.

2-yen, your caution on banks is justified and I have been a seller of US banks. I'm out of US banks but one. I received my $1 dividend from BAC on March 27 and sold this morning. Only BBT remains, but a limit order is in. I'm not necessarily all anti-bank and I'm holding the line on Canadian banks. I've limited myself to TD, RY, and BNS. I feel the odds are good that they won't have to cut. With other finance companies, such as MFC and PWF, I'm not so confident, but continue to hold. I will build other sectors as you are til things look a bit better.

Elizabeth Stanton notes that the number of 'dividend aristocrats' has been reduced. Good time for pruning one's own portfolio, I'd say. The best companies, the companies that have produced results (and proved it by paying regular dividends) year after year, are much easier to spot these days.

My strategy is to sell dividend cutters if I can replace the dividend with companies such as these. Three companies she specifically mentions, GE, USB, and PFE are gone from my portfolio with no impact on my dividend income at all. The lost dividends were quickly replaced and my income is up. USB may be a buy again, but not until they reinstitute a significant and sustainable dividend and dividend policy.

Cheers

[Caleo]

Hi,

I can imagine how difficult it would be for someone who has just retired with the plan of SWing his/her funds or selling stocks for bread..

What is "SWing his/her funds", please?

[Sensei]

Hi,

Sorry. SW means systematic withdrawal and SWP is a systematic withdrawal plan. It's like the opposite of dollar cost averaging (DCA). You withdraw the same amount of money every month from your fund portfolio. That means that your fund units gradually get less and less. It works well (on paper) in a rising market because even if your number of fund units is decreasing, they are also increasing in value, thus offsetting the reduction. But the strategy could be a disaster in a falling market, especially if it is the first year of your retirement, since you are reducing your unit base faster. Less units means recovery power in the next upswing.

Cheers

[2 yen]

Sensei....which is why saving and saving and saving some more should be the priority of new graduates. You gotta start early to be safe, if you think you won't have a company pension.

[Michael D]

Agree, withdrawing capital and reducing units erodes the income stream fast. In a perfect case, your dividend portfolio acts as an annuity. You'll never know if you will live to 100.

Or, you can retire a bit more actively and go down in flames at 80

[Taggart]

Yesterday, UBS' strategist George Vasic gave out a 12 stock list.

"The updated 12-stock list consists of Bank of Nova Scotia, Bombardier Inc, EnCana Corp., Goldcorp Inc., Petro-Canada., Potash Corp of Saskatchewan Inc., Research In Motion Ltd., Royal Bank of Canada, Shoppers Drug Mart Corp., Tim Hortons Inc., Toronto-Dominion Bank, and TransCanada Corp."

---------------------------------------------------

Some of these equities are on my watch list and others for various reasons aren't. Then again, I'm just an amateur, not an analyst.

[Shakespeare]

I'm not sure I can see holding "dividend growth" stocks yielding less than RRBs (about 2%) at this point. With future growth potentially just matching the inflation rate, why take equity risk for a smaller payout?

[OptsyEagle]

I think there is a big opportunity in companies that cut their dividend simply to be safe or to deal with re-financing issues (banks telling them to cut off the shareholders to build a bigger equity cushion to protect them). This is in contrast to the companies that cut their dividend because their earnings have fallen off the radar screen and are unlikely to return.

Obviously the second type of company is certainly one to be avoided, but the first type will most likely not only survive but re-instate a good dividend policy as soon as the black cloud of this recession passes.

The reason for the opportunity is due to the fact that the stock market is labelling them all with the same brush. They really shouldn't. There is a big difference. Good luck to you all.