Investing success in a weak economy means being choosier about which dividend stocks you own.
A couple of prominent dividend stocks, Rogers Communications and Potash Corp., disappointed investors in January. A lesson here is to recognize that a past record of dividend growth is rapidly losing credibility as an indicator of future increases in dividends.
Rogers has a recent history of raising its dividend every spring. But in announcing its fourth-quarter earnings last month, the firm said it wants to reduce debt before increasing its quarterly payout. That means the next dividend payment, scheduled for April 1, will remain at 48 cents (note: I own some Rogers shares). One stock does not make a trend. But as I discussed in this recent column, there's a broader movement toward slower dividend growth in Canada.
Dividend cuts have been common in the energy sector and among some gold producers in the past year or so. But one commodity stock that stood tall was Potash, which has one of the strongest dividend growth records in the country in the past five years. Now, the company is lowering its payout. Thanks to depressed potash prices, the company recently said it would cut its dividend by 34 per cent.
Extreme wariness toward commodity stocks is just one way in which people should take a tougher stance in dividend investing in 2016. Until the global economy revives enough to spike demand for energy and other resources, dividends will be under downward pressure in the commodity sector.
The Rogers example suggests caution when investing in companies in highly competitive sectors like telecom. Rogers CEO Guy Laurence called the past Christmas shopping period the "the most fiercely competitive quarter, probably in the history of Canadian mobile, and in my view it's the new normal." It's hard to be optimistic about big dividend hikes in that environment.
Upping your game as a dividend investor also means taking a closer look at how a company's payouts have tracked through previous economic cycles. A short burst of dividend hikes in recent years is not as confidence-inspiring as steady long-term gains. Consider U.S. stocks if you can't find any good Canadian dividend growth candidates in certain sectors. Johnson & Johnson, the U.S. health care giant, clocks in with 53 straight years of rising dividends.
Finally, reduce your expectations for total returns from dividend stocks. We're hearing a lot these days about how gains from the broad stock market will likely be lower in the years ahead than we're used to. Dividend stocks will have their role in this future of diminished results as lower dividend increase hold back share price gains. Dividend stocks will still offer competitive total returns, but not like they used to.
Rob Carrick