Month: January 2023

Last updated by BM on January 30, 2023

Summary

• This article is part of our weekly series (MP Market Review) highlighting the performance and activity from the previous week related to the financial markets and Canadian dividend growth companies we follow on ‘The List’.
• Last week, ‘The List’ was down slightly with a +3.8% YTD price return (capital). Dividend growth of ‘The List’ increased to +4.4% YTD, demonstrating the rise in income over the last year.
• Last week, there were two dividend increases from companies on ‘The List’.
• Last week, there were two earnings reports from companies on ‘The List’.
• Two companies on ‘The List’ are due to report earnings this week.
• Are you looking to build an income portfolio of your own? When you become a premium subscriber, you get exclusive access to the MP Wealth-Builder Model Portfolio (CDN) and subscriber-only content. Start building real wealth today!  Learn More

“Investing is where you find a few great companies and then sit on your ass.”

– Charlie Munger

Noticing that two great companies (MRU-T) and (CNR-T) increased their dividends last week, we couldn’t help but wonder what our list of quality dividend growers would look like if one of our criteria were twenty years of dividend growth instead of ten. The list would be smaller, but we wondered what their dividend growth metrics would look like. Here is what we found:

10YR_CAGR-The List-01-01-2023 – 20+ YR of DG

Remember that the data in this chart displays returns derived from purchases made on January 1, 2013, regardless of valuation. By being a bit more active and following our process of only buying when companies are sensibly priced, we strive to do even better than this passive approach.

In summary, many metrics are similar, which tells you a few of things:

First, from a total return perspective, owning twenty-seven dividend growth stocks isn’t much different from owning eight non-cyclical, quality dividend growers, across a few sectors. In fact, you would probably be just as well off owning a basket of ten to fifteen quality companies from ‘The List’ as opposed to the entire list of dividend growth stocks we follow. It certainly would be a lot easier to monitor a smaller portfolio.

Secondly, these companies once had dividend growth streaks of ten years and comprised a very small list of dividend growth stocks in Canada. Seeing them extend their streaks for an additional ten years and beyond tells you how safe investing in companies with an established dividend growth policy can become.

Finally, the returns from companies with dividend streaks longer than twenty years appear to be even more predictable using our Growth Yield metric. Both the Historical Growth Yield and Estimated Growth Yield are almost identical. Historically, building a dividend growth portfolio with a >7% Estimated Growth Yield has been among the best predictors of market-beating returns.

For more info on Growth Yield, see one of our Top Posts; Using Growth Yield (YOC) To Build Powerful DGI Portfolios.

Last updated by BM on January 23, 2023

Summary

• This article is part of our weekly series (MP Market Review) highlighting the performance and activity from the previous week related to the financial markets and Canadian dividend growth companies we follow on ‘The List’.
• Last week, ‘The List’ was up slightly with a positive +4.1% YTD price return (capital). Dividend growth of ‘The List’ ticked upwards to +3.7% YTD, demonstrating the rise in income over the last year.
• Last week, there was one dividend increase from a company on ‘The List’.
• Last week, there were no earnings reports from companies on ‘The List’.
• Two companies on ‘The List’ are due to report earnings this week.
• Are you looking to build an income portfolio of your own? When you become a premium subscriber, you get exclusive access to the MP Wealth-Builder Model Portfolio (CDN) and subscriber-only content. Start building real wealth today!  Learn More

“We all hope for capital gains, but the only thing we can really count on is the dividend” and “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”

– Warren Buffett

As successful dividend growth investors, we understand that rising dividends are a foundation for higher share prices over time. 

Here is the Compound Annual Growth Rate (CAGR) of dividends and the CAGR of price over the last decade so that you can study the evidence that as the dividend grows, so does the price.

10YR_CAGR-The List-01-01-2023

A few things are to be gleaned from this historical data.

First, the current yield of ‘The List’ is rising. Stocks were expensive in 2013 and are more sensibly priced now than they were a decade ago.

Secondly, the historical growth yield of ‘The List’ at 6.6% is only about 1% lower than the total annualized return (7.7%) of the TSX composite index over the last decade. Dividends alone, received from companies on ‘The List’ bought ten years ago, will soon outperform the total return of the index after a couple more years of dividend growth.

Nineteen of the twenty-seven companies on ‘The List’ more than doubled their price in the last decade, and you would be hard-pressed to find a dividend ETF or dividend mutual fund that outperformed the total return (CAGR 10Y TR) of ‘The List’ in the last ten years.

Finally, notice the alignment of dividend growth (CAGR 10Y DG) and price growth (CAGR 10Y PG). For the last decade, they have been almost identical, with annualized returns of 10.0% and 10.3%. An increasing income, over time, drives our capital returns.

Once again our yearly decade long, annual year-by-year dividends sheet shows our dividends are stable and predictable. Understanding how dividends work and how they ultimately drive portfolio performance is one of the most powerful concepts to understand about investing. It is what we do differently that sets us apart from the crowd.

Last updated by BM on January 16, 2023

Summary

• This article is part of our weekly series (MP Market Review) highlighting the performance and activity from the previous week related to the financial markets and Canadian dividend growth companies we follow on ‘The List’.
• Last week, ‘The List’ was up sharply with a positive +3.8% YTD price return (capital). Dividend growth took a step back with the dividend cut announced by (AQN-N). ‘The List’ is at +3.5% YTD, demonstrating the rise in income over the last year.
• Last week, there were no dividend increases from companies on ‘The List’, but there was a dividend cut.
• Last week, there were no earnings reports from companies on ‘The List’.
• No companies on ‘The List’ are due to report earnings this week.
• Are you looking to build an income portfolio of your own? When you become a premium subscriber, you get exclusive access to the MP Wealth-Builder Model Portfolio (CDN) and subscriber-only content. Start building real wealth today!  Learn More

“Having a framework that objectively improves the probability of being directionally accurate is more important than having the most intellectually compelling narrative. Some of the smartest people out there are just as likely to be dead wrong, no matter how compelling their narratives sound. Investing success is a game of having a probabilistic advantage that enables returns to compound over time.”

– Josh Steiner, Hedgeye

One of the reasons we publish ‘The List’ is so that we can ‘coach’ others on how to select and monitor dividend growth stocks for their portfolios. Its purpose is to provide investment ideas and a real-time illustration of dividend growth investing in action. It is not a ‘Buy List,’ nor a portfolio that reflects the composition or returns of our Magic Pants Wealth-Builder (CDN) Portfolios. It is only a starting point for our analysis and discussion of dividend growth investing concepts.

Last week one of the companies on ‘The List’, Algonquin Power & Utilities (AQN-N) announced a 40% dividend cut. Although dividend cuts are rare for dividend growth companies, they do happen.

As part of our process audit, we will take a few paragraphs to review the signs leading up to the dividend cut by (AQN) to see if we need to change anything or if an investor following our process could have seen this one coming. A good process means you review your decisions when they fall outside your expectations.

Here is an excerpt from the article we published on our blog titled ‘Our Dividend Growth Investing Process’.

“By standing on the shoulders of giants, those great investors who came before us, we have come up with a process that is simple to understand with only three basic rules:

1. Quality; only buy large-cap companies that have a long dividend growth streak and good financial safety metrics in an industry that is stable and growing.
2. Valuation; look to buy a company that is sensibly priced or undervalued by looking at a company’s track record. Undervaluation introduces a margin of safety. You are in essence tilting the odds in your favor that future price movements will be upwards.
3. Monitor; keep an eye on your dividend growers; especially the current yield; fluctuations in yields send signals. The consistency of a firm’s dividend growth is the best measure of management’s confidence in the long-term growth outlook for a company.”

“We will also review our outcomes regardless of if they were good or bad. Having a good process means you go back and review your decisions when they fall outside your expectations. We can then make tweaks based on our findings and enhance our process. Only then will we know if we were good or just lucky.”

This week we see the importance of Rule # 3. By monitoring our quality dividend growers, we can see signs of possible dividend cuts and mitigate the damage they can do to our portfolios.

In the case of Algonquin Power & Utilities (AQN-N), the fluctuation in yield and slowing dividend growth in 2022 were definitely ‘red flags’. While many investors would have been attracted to a higher yield, we see yield fluctuations as a warning sign. This, combined with a lower dividend growth rate announcement in July 2022, should have alerted the dividend growth investor to do a deeper dive into company fundamentals. In doing so, the dividend growth investor would have seen that the company had issues servicing its debt due to higher interest rates. This was noticeable when looking at the dividend payout ratio, which climbed to over 100%. Paying out more than you take in eventually leads to financial trouble. A high payout ratio often precedes a dividend cut.

Fortunately, we have never owned a position in (AQN-N) in any of our Wealth-Builder Portfolios, but if we did, it is reassuring to know that our process would have signalled us to do more research and then it would have been up to us to take action and decide what to do next.

Here is an excerpt from an article on the blog dated March 2021 that may help when you have this type of decision to make. Selling Dividend Growth Stocks

“When we make an investment, we take a patient, long-term investment horizon and expect to hold the stock for decades, keeping portfolio turnover low. Generally speaking, we will only sell a stock if the safety of the dividend payment has come into question, the company’s long-term earnings power appears to have become impaired, the stock’s valuation reaches seemingly excessive levels, or we find a more attractive idea.”

As dividend growth investors, a dividend cut means the wealth-building stops, so, we know what to do. Deep-value investors may need more of a push. Research shows us that the probability of a successful outcome is greatly reduced after the dividend is cut or eliminated.

Last updated by BM on January 09, 2023

Summary

• This article is part of our weekly series (MP Market Review) highlighting the performance and activity from the previous week related to the financial markets and Canadian dividend growth companies we follow on ‘The List’.
• ‘The List’ ends 2022 with a negative -6.0% price return (capital) and positive +10.6% dividend growth (income). See summary below. We started a new list last week for 2023. We decided to keep ‘The List’ the same for 2023 as all companies increased their dividend again last year.
• Last week, ‘The List’ began the year with a positive +2.1% YTD price return (capital). The dividend growth of ‘The List’ is off to a fast start at +4.6% YTD, demonstrating the rise in income over the last year.   
• Last week, there were no dividend increases from companies on ‘The List’.
• Last week, there were no earnings reports from companies on ‘The List’.
• No companies on ‘The List’ are due to report earnings this week.
• Are you looking to build an income portfolio of your own? When you become a premium subscriber, you get exclusive access to the MP Wealth-Builder Model Portfolio (CDN) and subscriber-only content. Start building real wealth today!  Learn More

“Learn to eventually and mentally manage price declines as your dividend grows.”

Happy New Year!  It is that time of year when we reflect on our dividend growth strategy and how it fared in the worst stock market decline since 2008.

We can only imagine the amount of wealth destruction that took place for a lot of people last year. Fortunately, we discovered dividend growth investing after the last major market decline in 2008 and vowed we would not let that happen again. This 2022 summary of ‘The List’ will help demonstrate that even the most passive dividend growth investing strategy can safeguard your capital and provide you with a growing income stream.

At market close on the first trading day of the new year, we publish ‘The List’ of Canadian dividend growth stocks we will follow that year. The companies selected are from various industries, usually no more than four from one industry. We stay away from REITs and pure-play energy companies due to their cyclical nature. Next, we look for ten years of consecutive dividend growth and over one billion market cap. We hold the stocks for the entire year with weekly updates on their performance and insights throughout the year into how the company aligns, or not, as a candidate for your dividend growth portfolio.

Here is a copy of ‘The List’ and its year-to-date (YTD) performance on the last trading day of December 2022.

Last updated by BM on January 03, 2022

Summary

• This article is part of our weekly series (MP Market Review) highlighting the performance and activity from the previous week related to the financial markets and Canadian dividend growth companies we follow on ‘The List’.
• Last week, ‘The List’ was down slightly with a minus -6.0% YTD price return (capital). The dividend growth of ‘The List’ remains at +10.6% YTD, demonstrating the rise in income over the last year.   
• Last week, there were no dividend increases from companies on ‘The List’.
• Last week, there were no earnings reports from a company on ‘The List’.
• No companies on ‘The List’ are due to report earnings this week.
• Are you looking to build an income portfolio of your own? When you become a premium subscriber, you get exclusive access to the MP Wealth-Builder Model Portfolio (CDN) and subscriber-only content. Start building real wealth today!  Learn More

 “…for a lot of people, generating a portion of their income from lightly taxed – or even negatively taxed – dividends makes a lot of sense.”

– John Heinzl, (Negative tax on dividends? Yup, really), Globe & Mail

DGI Truth #5: Dividend growth investing is a tax-efficient strategy

One of the first things you discover when you begin working is how much money is taken off your pay cheque each week for income tax purposes. Eventually, you discover that the more you make, the higher tax rate applies (increasing marginal tax rate). It is then that you start to ask questions; “How do I hold onto a larger share of my income?”

For those looking to hold onto a larger share, generating dividend income may be part of the answer. Dividend income is taxed at a lower rate than many other forms of income due to the dividend tax credit (DTC). To avoid ‘double-dipping’ by the CRA and account for the tax the corporation issuing the dividend has already paid, the individual receiving the dividend is then entitled to a federal and provincial dividend tax credit.

Let’s look at an excerpt from the 2019 example published in the Globe & Mail by John Heinzl:

How to earn $52,000 tax free – no offshore account required

You are a resident of Ontario and have saved $1.3 million. You decide to retire and invest the money in a portfolio of dividend-growth stocks yielding an average of 4%. Your portfolio would generate an annual dividend income of $52,000, which we’re assuming is all received in a non-registered account.

When it’s time to file your tax return, the $52,000 would be listed on your tax slip as the ‘actual amount of eligible dividends’. To understand how dividend taxation works, however, we need to look at two other important numbers on your tax slip: the ‘taxable amount of eligible dividends’ and the federal ‘dividend tax credit for eligible dividends’.

The taxable amount of dividends is calculated by multiplying the actual amount by a ‘gross-up’ factor of 1.38 (38% is the basic federal corporate tax rate for Canadian-controlled corporations). This produces taxable dividends of $71,760. The purpose of the ‘gross up’ is to roughly estimate the pre-tax income the company (or, in this case, companies) would have to earn to pay you the dividend.

In our example, applying these DTC rates to the grossed-up dividend of $71,760 produces a federal DTC of $10,778 and a provincial DTC of $7,176. These amounts, combined with a federal tax credit of $1,810 (15% of the basic personal amount of $12,069), reduce your taxes to zero.

The reason is that before any credits, $71,760 of income would attract a tax of $16,858 but because you receive more than that in tax credits, you pay no tax on the dividend income.

Due to how the dividend tax credit functions, individuals with lower marginal tax rates receive a comparatively bigger benefit from earning income through dividends than individuals with higher marginal tax rates, but both will benefit from the dividend tax credit.

Will 2023 be the year you consider adding tax-efficient dividend income to your income mix?

Note: It is always a good idea to consult a tax professional to determine the most tax-efficient strategies for your specific situation.