What's in store for dividend investors in 2017?
Well, I have no particular insights regarding how the stock market will perform this year. It could continue to rise, go sideways or fall flat on its face. I've never tried to predict the market's short-term moves and I'm not going to start now.
What I'm comfortable saying is that, over the long run, shares of great companies – and the stock market in general – tend to rise. So, instead of trying to time the market's ups and downs – which nobody can do consistently anyway – I prefer to just stay invested. It's less stressful, and I'm convinced it's more profitable than trying to trade my way to wealth.
All of that said, I have decided to stick my neck out today. Although I may live to regret this, I am going to make several very specific dividend-related predictions about the year ahead. Not only that, but I am going to encourage you to save this column so that, a year from now, you can check back and see how I did. That's how confident (or stupid) I am.
Now, before I get into the specific predictions, let me back up and briefly explain my investing strategy for those who may not be familiar with it.
As the dividend investor with The Globe and Mail's Strategy Lab series, I focus on blue-chip companies that raise their dividends regularly. A growing dividend puts more money in your pocket and, just as important, it's a sign of a strong company. If a dividend grows consistently, chance are good that the share price will also rise.
Focusing on growing dividends has produced some gratifying results.
Since Strategy Lab was launched on Sept. 13, 2012, my model portfolio has produced a total return (including dividends) of 64.6 per cent through Dec. 31, 2016. That works out to 12.3 per cent on an annualized basis – beating the S&P/TSX composite index's annualized total return of about 8.3 per cent over the same period (also including dividends).
The past year was especially good to my portfolio, which posted a total return of 21.5 per cent in 2016 – tops among the four Strategy Lab participants.
Now, with that shameless boasting out of the way, it's time to get out my crystal ball for 2017.
As I said, I don't make predictions about the market. However, when it comes to dividends, I'm comfortable talking about the future. That's because, even as the market see-saws with every news headline, dividends are actually quite stable and predictable.
So here is my first prediction: Brookfield Infrastructure Partners LP (BIP.UN – TSX) – currently my model portfolio's biggest holding – will raise its distribution (it's not technically a dividend) when it announces fourth-quarter results on Feb. 1. Further, I predict the increase will be at least 5 per cent (the low end of Brookfield Infrastructure's annual distribution growth guidance range) and perhaps even bigger than 9 per cent (the high end of its guidance range).
What makes me so confident? Well, more than 90 per cent of Brookfield Infrastructure's cash flow is either regulated or contracted on a long-term basis, which makes its earnings very predictable. In addition, more than 70 per cent of its EBITDA (earnings before interest, taxes, depreciation and amortization) is indexed to inflation. Finally, its portfolio of infrastructure assets – including railways, toll roads, ports, pipelines, utilities and communications towers – is growing at a healthy pace, churning out rising amounts of cash to fund a growing distribution.
Now for my second prediction: Telus Corp., another one of my Strategy Lab holdings, will raise its dividend, not once, but twice in 2017. How do I know this? Telus has been hiking its dividend semi-annually since 2010, and last year it said it pledged to continue doing so from 2017 through 2019, with cumulative increases of 7 to 10 per cent annually.
Wait. My crystal ball is giving me some additional information about Telus's dividend hikes. It's telling me the hikes will be announced in May and November. That's been the pattern in recent years and I have no reason to believe it will change in 2017.
It's important to understand that dividend increases aren't official until the board approves them, but companies usually don't make dividend growth forecasts unless they are confident they can deliver. Things sometimes go wrong, but these are the exceptions.
My next prediction is a two-for-one deal: I predict that Procter & Gamble Co. and Johnson & Johnson – my two U.S. holdings – will increase their dividends in April. Both companies have been raising their dividends for decades – 60 years consecutively for P&G and 54 years for J&J – and I'm confident the streak will continue in 2017.
Just a few more predictions and then I'll put away my crystal ball.
Pipeline operator Enbridge Inc.will increase its dividend by a total of about 15 per cent in 2017, conditional on the closing of its $37-billion acquisition of Houston-based Spectra Energy Corp. I'm just quoting the company, which has signalled an initial dividend hike in January, possibly followed by a second hike after the transaction is finalized.
I also predict that Canadian Utilities Ltd. will raise its dividend in January, as it's been doing for years. Finally, I expect that that BCE Inc. and TransCanada Corp. will both announce hikes when they release fourth-quarter results, likely in February. TransCanada, for its part, has said it intends to raise its dividend by 8 to 10 per cent annually through 2020 and that increases could be "at the upper end" of that range.
That's not an exhaustive list of the dividend hikes I expect in 2017 for my Strategy Lab portfolio, but it covers most of them. Now it's up to the companies to deliver.
If they don't, I'll have some explaining to do.