John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
The dividend gods giveth, and the dividend gods taketh away.
As the first year of Strategy Lab draws to a close – the anniversary is Sept. 13 but, strangely, still no word on caterer, venue, etc. – this is a good time to look back at the hits and misses of the past 12 months.
Let's start with the bad: A few stocks in my Strategy Lab model dividend portfolio have been clobbered. Utility company Fortis (FTS) has skidded about 9 per cent since I "bought" it last September. The iShares S&P/TSX Capped REIT Index Fund (XRE) – made up of Canada's largest real estate investment trusts – is off about 12 per cent. Both are trading near 52-week lows.
Am I sweating? No.
The companies themselves are fine. The main problem is surging bond yields. Although utilities and REITs are equities, they have bond-like characteristics – namely steady, predictable cash flows – that make them vulnerable to rising rates.
Basically, when bond yields go up, the yields on dividend-paying stocks tend to rise in sympathy. That means share prices have to fall. With the yield on 10-year Government of Canada bonds climbing by roughly one percentage point since early May – a hefty rise – many dividend stocks have tumbled by double-digits.
It isn't just utilities and REITs that have been hit.
My model portfolio's pipeline stocks – Enbridge and TransCanada – are also well off their highs. Adding to the pain of rising rates, my telecom companies – BCE and Telus – came down with a bad case of Verizon-itis, although both are recovering now that the U.S. giant has decided to take a pass on Canada.
The good news is that the portfolio is still up about 10 per cent since inception, including dividends.
Even as my portfolio suffered some scrapes and bruises, I remain committed to the dividend growth cause. My goal at the outset was to build a collection of solid, conservative companies that will throw off a stream of cash that grows for years to come, and in that respect the portfolio is off to an auspicious start.
Over the past year, all 12 of my holdings have raised their dividends. Two of them – Telus and Royal Bank of Canada – raised their dividends twice. This is the beauty of dividend growth investing: I don't know what share prices will do from one day to the next, but I am fairly certain that the stocks in my model portfolio – all of which I also own personally – will continue to raise their dividends.
If the dividends are growing, share prices will eventually follow. In the meantime, I am "paid to wait," to use a favourite expression of dividend investors.
Some companies raise their dividends so predictably, you can practically set your watch to them. McDonald's, for example – another company in my model portfolio – has boosted its dividend every year since 1976. The next increase from Mickey D's is expected on or about Sept. 19 and could be as high as 13 per cent, according to Bloomberg.
Set against a long-term backdrop of growing dividends, short-term share price drops aren't so scary.
In fact, for those who are reinvesting dividends or plowing new money into the market, selloffs such as the one we've witnessed recently can be a terrific opportunity to redeploy cash at lower prices and higher yields.
Sometimes, you have to hold your nose when you're reinvesting in stocks that have been stinking up your portfolio. But that's what I'm going to do today.
Specifically, I'm going to use the "cash" that's built up in my model portfolio – about $869 worth – to buy 10 shares of Fortis and 30 units of XRE, which are now yielding 4.1 per cent and 5.2 per cent, respectively.
Those new shares will spin out more dividends, which in turn can purchase more shares, which will produce more dividends. And so on.
That is the essence of the dividend growth strategy.
John Heinzl