What method does The Globe and Mail use to calculate five-year dividend growth rates shown on its website? How often is the number updated? In some cases, I cannot make sense of these figures. One example is Timbercreek Financial Corp. TF-T, which is shown as having 15-per-cent dividend growth but which doesn’t appear to have raised its dividend in more than five years and has not had a stock split.
I’m a big fan of companies that raise their dividends regularly. Apart from putting more money in your pocket, a growing dividend is often a sign of a healthy business. Learning how to identify these companies and interpret dividend growth rates is an important skill for investors. As you’ve discovered, however, not all dividend data you find online can be trusted, so today I’ll show you how to calculate these numbers yourself so you can verify their accuracy.
Five-year dividend growth rates are available in a couple of places on The Globe website. For individual companies, if you call up a stock quote and click on the “Dividends” tab, you will see a table of numbers that includes dividend growth, yield and the company’s upcoming dividend payment date. To find dividend growth rates for multiple companies, open your stock Watchlist, click on the “Dividends” view and look under the column labelled “5-YR GRW”.
As far as I have been able to determine, this metric measures the compound annual dividend growth rate for the five-year period up to and including the most recent full calendar year. So, if you’re looking at a company’s dividend growth rate today, it will include data only to end of 2022, as there are still a couple of weeks left in 2023.
To understand how these growth rates are calculated, let’s look at a specific example. We’ll use Capital Power Corp. (CPX), one of the stocks in my model Yield Hog Dividend Growth Portfolio.
According to Capital Power’s website, in 2017 the Edmonton-based power producer declared dividends totalling $1.615 per share. The company raised its dividend in each of the following five years, and by 2022 its annual payout had grown to $2.255, representing total growth of about 39.6 per cent. (Divide $2.255 by $1.615, subtract 1, then multiply by 100 to get the percentage change.)
Now, the question is: What does growth of 39.6 per cent over five years work out to on a compound annual basis? We’ll need to do a little more math to find out.
If a dividend grows by 39.6 per cent over five years, that’s the same as multiplying the starting dividend by 139.6 per cent, or 1.396. To convert that last number into an annualized figure, you’ll need to calculate the fifth root of 1.396. This is the number that, when raised to the power of five, equals 1.396. Thanks to the magic of Google, you can simply enter “What is the fifth root of 1.396?” into your search engine and get the answer: 1.069. (Or you could use a calculator with an nth root function.)
We’re almost there. The final step is to subtract 1, which leaves us with 0.069, or 6.9 per cent. Voilà: We’ve just calculated Capital Power’s five-year dividend growth rate.
Good news: it exactly matches the five-year dividend growth rate for Capital Power provided on the Globe website.
Now, the bad news: dividend growth rates published online aren’t always so accurate.
Timbercreek Financial is a case in point. If you visit the investor relations section of the company’s website and call up its “Dividend History”, you’ll see that the monthly payout hasn’t changed since at least 2017. So the true five-year growth rate is zero, not 15 per cent.
It’s not just The Globe that got this one wrong. I also checked TMX Money and Morningstar (which provides dividend growth data to The Globe) and found similar mistakes. That’s why I always advise people to go directly to the source instead of relying on third-party websites for financial data.
Another thing you wouldn’t know about Timbercreek without checking its website: Its “dividends” are actually 100-per-cent interest (with a tiny amount of capital gains in 2018). Interest distributions are taxed at one’s full marginal rate in a non-registered account and do not qualify for the dividend tax credit. That could be a deal-breaker for some investors.
Now that you know how to calculate dividend growth rates yourself, you can verify that the numbers you find online are accurate. Just remember that, while a history of dividend increases is often a sign of a great company, it’s not the only metric you should look at when evaluating a stock. Sales and earnings growth, valuation and the company’s competitive “moat,” among other factors, are also important considerations.
I’ve been considering doing some tax-loss selling. I am still uncertain about a couple of things, though. One is the 30-day period before repurchasing: Is it 30 calendar days, market days or business days? The other is about dividends. If the ex-dividend date is within the 30 days, does it make sense to sell and lose the dividend? For instance, if a stock has an ex-dividend date of Dec. 21, is it better to sell now or wait until after the 21st?
To avoid a superficial loss, which cannot be claimed for tax purposes, you must wait at least 30 calendar days before repurchasing the same security.
Regarding your question about dividends, I wouldn’t let this affect your decision one way or the other.
If you sell before the ex-dividend date, yes, you will “lose” the next dividend, but – all else being equal – you will receive a higher price for your shares. If you sell on or after the ex-dividend date, on the other hand, you will receive the next dividend but – again, all else being equal – the market price of the shares will adjust lower because the buyer will not be entitled to the dividend. Lots of other factors affect stock prices, of course, but the bottom line is that whether you sell before, on or after the ex-dividend date, the net outcome will be the same.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
John Heinzl