John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
Humble admission: I have no idea what the stock market will do in 2016.
For all I know, the S&P/TSX could rise 1,000 points, fall 1,000 points or be flat.
Bond yields? Don't know. The loonie and crude oil? Beats me.
But here's something I can say with a high degree of confidence: Most of the companies in my Strategy Lab model dividend portfolio will raise their dividends at least once in 2016.
How can I be so sure?
Well, some of the stocks I own have been raising their dividends regularly for decades. Procter & Gamble (PG) and Johnson & Johnson (JNJ), for instance, have raised their dividends annually for 59 and 53 years, respectively, and – barring a large comet striking the Earth – I fully expect the pattern of annual increases to continue.
Some companies are so predictable, they even tell you how much they expect their dividends to grow.
Pipeline and power company TransCanada (TRP), for example, recently said it aims to raise its dividend by 8 per cent to 10 per cent annually through at least 2020, driven by $13-billion of small- and medium-sized projects. TransCanada usually announces dividend increases in February, so I'm expecting another "raise" soon.
Another predictable distribution grower is Brookfield Infrastructure Partners LP (BIP.UN).
The operator of utilities, toll roads, ports and other cash-generating infrastructure assets targets annual distribution growth of 5 per cent to 9 per cent, with increases also usually announced in February.
A few companies raise their dividends twice a year. Telus (T), for instance, typically hikes its dividend in May and November – at a total annual growth rate of about 10 per cent – and the company has said it intends to continue doing so through at least 2016.
It's important to remember that dividend increases aren't official until they are approved by the board.
But when a company goes on the record saying it expects to raise its dividend by a certain amount, you can bet that it will do everything in its power to deliver.
Compared with stock prices – which bounce around with economic and earnings news, geopolitical events and good old-fashioned greed and fear – dividends are a model of stability and calm; good companies pay them – and raise them – regularly.
That's why I build my investing philosophy around dividends.
What about rising interest rates? Won't the Fed's tightening cycle – which started in December and is expected to continue in 2016 – clobber dividend stocks?
Not necessarily, for a few reasons.
First, plenty of dividend stocks have already been hit hard, including pipelines, real estate investment trusts (REITs), and some banks and utilities. Yields on these stocks have climbed as a result – substantially in come cases – which could attract buyers and limit the potential downside.
Second, the U.S. Federal Reserve has pledged to raise rates gradually, and only if justified by the economic data. The Bank of Canada, meanwhile, is expected to remain on hold – or possibly cut its benchmark rate again – given the shaky state of the economy.
Finally, even if rates do rise, it isn't necessarily a death sentence for income-producing stocks. Contrary to conventional wisdom, some sectors – REITs, for example – actually hold up relatively well in such an environment, because rising rates usually signal a strengthening economy, which leads to higher occupancy levels and rising rents.
What's more, unlike bonds, which have a fixed coupon, the stocks in my portfolio raise their dividends regularly and these rising "coupons" should help to mitigate the impact of rising rates.
While it's anyone's guess what the stock market will do in 2016, I fully expect my portfolio's dividend income to continue growing – not just in the year ahead but for many years into the future.
That's a prediction I'm comfortable making.
John Heinzl