Rob Carrick
Dividend investing has received so much attention in the past few years that it's hard to imagine there's anything new to learn about the topic.
A new publication called Dividend Advisor is taking a stab at it, though. This monthly newsletter from TSI Wealth Network (they publish The Successful Investor) focuses on dividend sustainability, or the ability of a company to keep making its quarterly dividend payments without interruption. Dividend growth is a widely discussed strategy, and lots of investors put a premium on stocks with high yields. But sustainability hasn't had as much attention, possibly because it's tough to assess.
One measure is the dividend payout ratio, which is available to users of our Watchlist feature (check the dividend view of your watchlist). The payout ratio measures the percentage of corporate earnings paid out as dividends. The problem with this ratio is that there are different standards for different industries, and the numbers can occasionally look erratic due to accounting issues.
Dividend Advisor uses an eight-point process to develop a Dividend Sustainability Rating designed to indicate to investors how reliable a company's cash payouts to shareholders are. Vernon Jones, managing editor at TSI Wealth Network, said the ratings were developed over a three-month period in which 30 different factors were tested and then reduced to eight points. They are:
- a long-term record of dividend payments
- a recent dividend increase
- management's public commitment to a dividend
- being in a non-cyclical industry
- limited exposure to exchange rate/political risk
- an attractive balance sheet
- a record of earnings and cash flow
- industry prominence
Some of these factors are data-based, while others are more subjective. Mr. Jones said analysts on staff at TSI will grade companies on their performance in areas like public commitment to paying a dividend. "They're quite expert in reading the tea leaves for any statements being put out by the company and its executives," he said. In the first couple of editions, Dividend Advisor has recommended stocks ranging from Toronto-Dominion Bank and BCE to RioCan REIT and Calian Group.
Mr. Jones said TSI has long covered dividend stocks in its various publications, but readers have recently been asking for more. Another reason for the new focus on dividend stocks is to address the tendency of some readers to focus on high yields, which can be a risk signal in a stock. "A lot of investors are naively focused on yield, and we didn't want to encourage that kind of thinking," he said. "It isn't just about yield – it's about whether you expect a dividend being paid at roughly the same rate, or a higher rate, 10 years from now. Does the company have what it takes to sustain that dividend?"
Rob Carrick