I’m not going to sugarcoat it.
It’s been a tough year for my model Yield Hog Dividend Growth Portfolio. Not catastrophic, but disappointing. With interest rates and inflation both rising, many dividend stocks struggled just to tread water. That’s not surprising, given that higher interest rates make it more expensive for companies to borrow money, and typically compress valuations for yield-oriented stocks.
When investors can get a 5-per-cent yield on a one-year guaranteed investment certificate, dividend stocks suddenly don’t look quite as appealing. So their share prices tend to fall, which pushes up their yields to make them more competitive with GICs and bonds.
How bad was it? Well, as of Dec. 15, the model portfolio was valued at $147,143. That’s up 47 per cent from its starting value of $100,000 on Oct. 1, 2017, but down about 4.8 per cent since the start of the year. This is the portfolio’s total return, including dividends, so individual share prices were hit even harder than that, on average. (Note: The model portfolio doesn’t use real money, but I also own all the stocks personally, so it’s more than a theoretical exercise for me. View the complete portfolio here.)
It hasn’t been a great year for stocks, in general. The model portfolio’s performance was virtually identical to the S&P/TSX Composite Index’s total return, also including dividends, of negative 4.9 per cent through Dec. 15.
The year was also marred by at least one unpleasant surprise. In November, Algonquin Power & Utilities Corp. AQN-T – an original member of the portfolio – cut its full-year guidance and put its long-term growth targets under review, citing the impact of higher interest rates and delays facing certain renewable power projects, among other factors. Because analysts expect that Algonquin will put dividend increases on hold and may even have to cut its payout, I removed it from the model dividend growth portfolio. However, I remain a shareholder of the company personally.
With all of that said, it’s not like the year was a complete bust.
When I started the model portfolio, my primary goal was to identify stocks that would raise their dividends. In addition to putting more money in investors’ pockets, dividends that grow steadily are a short-cut way to identify strong companies. When a company increases its dividend, it’s usually a sign that management and the board are confident about the business.
What’s more, growing dividends are a great way to fight back against inflation. Whether you’re retired and collecting a pension or still working, supplementing your income with dividends that grow can help you pay the bills and contribute to a sense of financial well-being. From an emotional standpoint, a steady flow of dividends also makes it easier to cope with market volatility of the sort we’ve seen in the past year.
Now for the silver lining.
I’m happy to report that, even as stock prices struggled in the face of high inflation and rising interest rates, most of the companies in the model portfolio continued to boost their dividends this year, including all of the banks, utilities, pipelines, telecoms and both exchange-traded funds. The only exceptions were three real estate investment trusts – namely Choice Properties REIT (CHP.UN), Canadian Apartment Properties REIT (CAR.UN) and SmartCentres REIT (SRU.UN).
Getting dividend increases is nice, but to really appreciate the power of dividend growth, you need to step back and look at the big picture. Let’s do that now.
When I launched the model portfolio a little more than five years ago, it was generating projected annual income of $4,094, based on dividend rates at the time. Now, thanks to dozens of dividend increases and regular dividend reinvestments, the portfolio is churning out $6,708 of cash annually – an increase of about 64 per cent since inception. Did your salary or pension income increase by that much? For most people, it probably didn’t.
And, remember, this is the income based on current dividend rates, which will almost certainly continue to rise. In the first quarter of 2023, for example, I’m expecting dividend or distribution increases from companies including TC Energy Corp. (TRP), BCE Inc. (BCE), Brookfield Infrastructure Partners LP (BIP.UN) and Restaurant Brands International Inc. (QSR). Dividends aren’t official until the board declares them, but these companies all have a well-established pattern of raising their payouts.
What does 2023 hold for share prices? I’ve never tried to predict the stock market’s behaviour, and I won’t start now. What I will say is that, based on the annual performance of the S&P 500 going back to 1928, the market has been up nearly 73 per cent of the time, and down about 27 per cent (including 2022). Back-to back losses are rare, but they do happen, so there could be more pain ahead, depending on what happens with interest rates, inflation, the economy and the geopolitical landscape.
But as long as my dividends keep rolling in, I’ll sleep tight.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
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