Hear that? That's the sound of no major dividend cuts this earnings season.
It's a welcome relief from past quarters when dividend stalwarts such as General Electric announced earnings were too weak to pass along the normal payout to shareholders.
Dividends have taken on new importance in the wake of a 25-year bull market when capital gains stole the show. Investors can now generate income well above record-low bond yields without the equity-market risk.
Even if you factor in market gains over the past quarter century, dividends account for about 65 per cent of the total return of Canadian equities since 1974, says Marc-André Robitaille, president of Montreal-based Robitaille Asset Management. "Dividends are a big portion of total returns over the long term," he says.
His $600-million AGF Dividend Income Fund is up more than 16 per cent this year thanks to income generators such as Toronto-Dominion Bank (3.9 per cent yield), Bombardier Inc. (2.3 per cent yield) and ARC Energy Trust (6.2 per cent yield).
The AGF Dividend Income Fund targets an average annual yield of 4 per cent. The big yield machines are trusts, which average 7 per cent but have been reluctant to boost dividends ahead of a 2011 change to their tax status.
You're getting a high-income portfolio but you're also getting a portfolio of companies that have the ability to grow. Som Seif, president, Claymore Investments
On the other hand, the big five Canadian banks pay a 4-per-cent average yield and are seen as rock-solid dividend growers because they have never failed to pay out.
Utilities also average 4 per cent. BCE Inc. has traditionally led the pack with a 6.3-per-cent yield, but Mr. Robitaille is putting his money on Rogers Communications as a contender with a 3.6-per-cent payday. "It's a company that has been increasing its dividend since it had the cash flow to do it over the past year or two," he says. "They didn't increase it this quarter but I do foresee a dividend increase in the future."
The portfolio gets an extra boost from a two-part "cash flow capture strategy." First, the fund buys select stocks based strictly on high-dividend yields, regardless of valuation or growth potential. One example is cigarette stocks, which have no growth potential but yield in excess of 5 per cent.
The second part of the strategy involves buying and selling stocks around their payout dates for the sole purpose of collecting the dividend - like putting a bucket under a tap only when the water is about to flow. Once a stock pays out, Mr. Robitaille says, he sells it and tries to invest in another that is about to pay out in the same sector.
The dividend picture is just as bright on a global level, says David Tiley of Vancouver-based Cundill Investment Research. "In addition to no longer seeing cuts of dividends, we're seeing dividends being reinstated and even increased," he says.
His $90-million Mackenzie Cundill Global Dividend Fund has returned 16.4 per cent this year thanks to some big payouts in Europe, where the average yield is 4 per cent compared with 2.5 per cent from the S&P 500.
Nearly a quarter of the fund is invested in five Italian stocks. The crown jewel is food giant Parmalat SpA, which yielded 7.2 per cent when it was added to the portfolio last fall.
In the spirit of legendary value investor Peter Cundill, Mr. Tiley picked up Parmalat when it was trading at what the Cundill value model considered 50 per cent of fair value. "We want big discounts to fair value, above-average dividends and stable dividends," he says.
For individual investors, choosing good dividend stocks is much more than just buying shares with the highest current yields. Strategies for finding the best and most consistent payouts vary from manager to manager.
Some exchange-traded funds have formulas that attempt to determine which companies are most likely to pay the best yields. For example, the Claymore S&P/TSX Canadian Dividend ETF tracks the S&P/TSX Canadian Dividend Aristocrats Index. According to the index a company is considered a "dividend aristocrat" if it has increased ordinary cash dividends every year for at least five consecutive years.
"You're getting a high-income portfolio but you're also getting a portfolio of companies that have the ability to grow," says Som Seif, president of Toronto-based Claymore Investments. Top holdings in the Claymore S&P/TSX Canadian Dividend ETF include Yellow Pages Income Fund (15.3 per cent yield), AGF Management Ltd. Class B (6.3 per cent yield) and First Capital Realty (6.5 per cent yield).
The fund has returned 19 per cent so far this year - slightly better than the average Canadian dividend fund. Mr. Seif says the difference can be attributed to the lower cost of a passively managed ETF.
Dividends in the Claymore ETF flow directly to the unit holder minus a management fee of 0.6 per cent. Management expense ratios (MERs) for actively managed dividend-focused mutual funds range from 0.85 to 3.75 per cent.
Both mutual fund and ETF unit holders are often given the option of reinvesting dividends in additional units in the form of a dividend reinvestment program (DRIP), or just taking the cash.
Dale Jackson is a producer at Business News Network.Report Typo/Error
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