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Ideas for Income Investors. High Dividend Stocks, Mutual Funds etc.
Expand Your Dividend Universe for Dividend Winners
Posted by: Gordon Pape (IP Logged)
Date: March 17, 2012 11:45PM
Dividends are the hot button for investors these days. Everyone wants stocks that have good cash flow and companies with a history of regular dividend increases are in high demand. There are three reasons for this.
Aging population. Older people tend to put more emphasis on earning income from their securities than do younger investors. That's because in a high percentage of cases they rely on investment cash flow to supplement pension income. With the baby boomers now reaching retirement age, the number of Canadians (and Americans) in this cohort is increasing every year, raising the demand for good dividend stocks in the process.
The short-lived income trust era whetted investors' appetites for cash flow. Now that the trusts are almost extinct (but not quite), people are looking to replace them with high-yielding common stocks, pushing up prices in the process.
Demand for safety. The crash of 2008-09 traumatized a generation of investors and older people bear the greatest psychological scars. Many have become obsessed with safety above all, to the point that they are putting much of their money into low-interest GICs even though the returns aren't keeping up with inflation. If these people do venture into the stock market, dividend stocks are at the top of their shopping list because they are perceived to be safer than those that offer little or no cash flow.
In fact, dividend-paying stocks are not immune from stock market crashes, as a look back at 2008-09 will attest. Banks and insurance companies, dividend-payers all, were among the biggest losers during the plunge and the insurers have yet to recover. So just because a stock pays a nice dividend, it does not necessarily mean it is "safe". Think Yellow Pages.
Higher gains potential. It is widely believed that dividend stocks have more capital gains potential than non dividend-payers. That's generally not true. The best dividend stocks from a steady cash flow perspective tend to be utilities and telecoms which have relatively limited gains potential because they are regulated industries. For unregulated growth companies, however, the sky is the limit.
Consider this. Three years ago at this time you could have purchased shares in non dividend-payer Apple (NDQ: APPL) for $96.30. They were trading on Friday at around $580 for a gain of 502% over that time. That works out to an average annual compound rate of return of 82%. No dividend stock comes close.
Don't misunderstand me. Dividend stocks definitely have a place in a portfolio. The point I'm making is that there is more to investing than dividends and not all dividend stocks are equal. If you want to know the true value of a stock, take a look at what it is producing in the way of total return in relation to the degree of risk it carries. And be prepared to look in some unexpected places.
I did an analysis of several of the dividend stocks on our Recommended List to see how they performed over the past 12 months (to March 15) in terms of total return. Some of the results may surprise you.
Boyd Group Income Fund (TSX: BYD.UN, OTC: BFGIF). This is one of the few remaining income trusts. It was originally recommended by Irwin Michael in late August 2010 at $5.50 and was trading one year ago at $8.07. At the time it was paying monthly distributions of $0.035 per unit ($0.42 a year) to yield 5.2%.
This Winnipeg-based operator of collision repair facilities isn't well-known among investors but it is a solid, well-run business. As word began to get around of the growing sales and profits, more people took note. Over the 12 months, Boyd stock moved up sharply to its current level of $12.76. Also, the fund increased its payout to $0.0375 a month in December. It was a modest increase but it sent the message that even now that it is taxable, the fund still has the financial strength to boost its payment.
Including the distributions, Boyd generated a total return of 63.4% over the past 12 months making it our best-performing dividend security. I don't expect to see a similar result in the next year, however, if only because the yield has dropped to a less attractive 3.5%.
Dollarama (TSX: DOL, OTC: DLMAF). In contrast to Boyd, Dollarama (a Gavin Graham recommendation) is a newcomer to the dividend ranks having just started making payments of $0.09 per quarter last June. But in terms of capital gains it has been one of the top performers on the TSX. Last year at this time, the stock was trading at $28; now it is over $45. Combined with the small dividend, we have a total return of 62% during that period.
Dollarama is an example of why investors should look beyond the dividend in assessing the profit potential of a stock. The current yield is a modest 0.8% but the company is clearly in a strong growth phase and has the added benefit of being recession-resistant because of the nature of the business.
Philip Morris International (NYSE: PM). If you are a socially-responsible investor, you won't want to have anything to do with this Tom Slee recommendation. If you don't care about their source, you'll love the profits. PM is, of course, one of the largest cigarette manufacturers in the world and it has a strong and growing presence in China and other developing economies.
One year ago the shares were priced at $63.58 and paid a quarterly dividend of $0.64 to yield 4% (figures in U.S. dollars). They're now trading at about $86 and the dividend has been increased to $0.77 ($3.08 a year) for a yield of 3.6%. Although the yield is lower, it is still attractive at that level. Total one-year return was 39.5%.
This is an example of a large-cap U.S. stock that has rewarded investors with both capital gains and cash flow. That's exactly the combination you want in a dividend stock. Too bad the company is in such a terrible business.
Enbridge (ENB). Some people don't like Enbridge's business either but it is certainly more socially acceptable than that of Philip Morris. And, like cigarettes, pipelines and natural gas distribution are profitable, even it they are regulated industries.
Enbridge was our best-performing large-cap Canadian dividend stock over the past 12 months and, like Philip Morris, the profits came from a combination of distributions and capital gains. A year ago, the shares were trading at $28.85 (split-adjusted) and were paying a quarterly dividend of $0.245 (($0.98 annually) to yield 3.4%. They are now over $38 and the quarterly dividend was recently increased to $0.283 ($1.13 a year) for a yield of 3%. The total 12-month return was 36.5%.
Franco-Nevada (FNV). This one may come as a real shock to readers. For the most part, gold stocks have done poorly recently but FNV's royalty structure has enabled the company to buck the trend. The shares pay monthly dividends which were $0.025 ($0.30 annually) a year ago. At that time the stock was trading at $33.45 to yield 0.9%. The monthly payment has since been raised twice and is now $0.04 per share ($0.48 a year). The price has moved over $41 but with the dividend increase the yield is actually slightly higher at about 1%. Based on the original purchase price it is 1.4%.
This is an unusual situation. The total return over the past year is about 25% with most of that coming from the capital gain, but the yield is actually higher than it was last March. While the cash flow may still seem anaemic, this is a company which has bucked the trend from a market price perspective while increasing its payout twice in the process. That is a very healthy situation and one which anyone interested in adding exposure to the gold sector should look at carefully.
Only three other Canadian dividend securities on our list produced a total return of better than 20% over the past year. They are BCE Inc. (BCE) which was up 22.9%, Tim Hortons (THI) which gained 22.6%, and RioCan REIT (TSX: REI.UN, OTC: RIOCF) which added 20.6%.
So here are the take-aways:
1. Yield is not the whole story when it comes to analyzing a dividend stock. Growth potential needs to be considered as well.
2. It pays to look outside the traditional dividend stock hunting grounds. Only two of our top performers (Enbridge and BCE) are classic blue-chip stocks.
3. Don't overlook small-caps. Our best performer over the past year, Boyd Group, falls into that category.
4. Trusts are still around (Boyd, RioCan) and should be a part of your dividend/distribution mix.
5. Stocks with a history of dividend increases should be considered even if the current yield is low.
In short, expand your dividend universe. There are more good choices out there than you may have thought.
Stocks Discussed: AAPL, ENB, PM, FNV, BEC, THIBFGIF, DLMAF,
Re Expand Your Dividend Universe for Dividend Winners
Posted by: Cornelius Chan (IP Logged)
Date: March 18, 2012 06:25AM
I gave you a 1-star only because all the stocks you mentioned are at all-time-highs or are near their all-time-highs. Other than that, I thought your article was for the most part a helpful colour commentary on dividend stocks.
However, because dividend stocks are my specialty, I do have a few important comments to make that will clarify the information in your writing.
First, your article is written on the assumption that investors are going out, looking for the highest yield dividend stocks and putting their hard-saved money in without regard for either current price or fundamentals. (I came across the term "yield pigs" in Seth Klarman's Margin of Safety that could be apropo here). But I doubt that is happening here at GuruFocus.
I mean come on, dividend stocks are like any other stocks, except they pay a dividend. They are not a separate asset class. Of course they rise and fall with any other stocks and of course they do not have more share price appreciation than other stocks. We aren't in kindergarten here my friend.
You took the time to track the share price appreciation of a famous non-dividend stock (AAPL). Let me take the time to track the share price of 3 dividend payers that beat Apple's supposedly unbeatable 3-year rise. (this took a couple minutes using google.finance screener; there are probably quite a few more given an exhaustive search...)
1. Advance America, Cash Advance Centers (AEA): +1070.79%
2. Herbalife Ltd (HLF): 990.88%
3. Seagate Technology (STX): 758.84%
Now, I know you were trying to make a point and I respect that. Just next time please don't be so dramatic as it becomes a bit one-sided. And it oversimplifies the conversation; sort of dumbs it down.
That is all for now. Overall, I thought your article was not too bad as it does go into some detail as a colour commentary on dividend stocks.
May I make a request? The next time you write an article that mentions stocks, please include a few you think are undervalued so we may take a look and do our own homework. This is the sort of helpful work that goes on here at GF.
Stocks Discussed: AAPL, ENB, PM, FNV, BEC, THIBFGIF, DLMAF,