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investor clinic

Winter is only a few weeks old. But spring is already here for dividend investors.

Thanks to softening inflation, falling bond yields and expectations that the Bank of Canada will cut interest rates several times this year, dividend stocks are blossoming again after spending the past couple of years in the cold.

The drop in bond yields has been dramatic. In the past three months, the yield on Government of Canada five-year bonds has declined more than a full percentage point, to about 3.3 per cent as of Friday afternoon.

All of this has provided a nice tailwind for dividend stocks in general, and my model Yield Hog Dividend Growth Portfolio in particular. (View the portfolio online at tgam.ca/dividend-portfolio.) Today, I’ll recap how the portfolio performed in 2023 and make a few fearless predictions for 2024.

The model portfolio finished 2023 with a total return, including dividends, of 5 per cent. All of that gain – and then some – came in the fourth quarter as bond yields sank and the portfolio returned 9.8 per cent, beating the S&P/TSX Composite Index by about 1.7 percentage points.

On a long-term basis, however, the model dividend portfolio still trails the index.

As of Dec. 31, the portfolio was worth $151,281.40, representing a total return of about 51.3 per cent from its initial value of $100,000 at inception on Oct. 1, 2017. On an annual basis, that works out to a return of about 6.8 per cent, compared with the S&P/TSX Composite Index’s annualized total return of about 8.1 per cent over the same period.

Now, let’s talk about my favourite subject: dividends.

When I launched the model portfolio more than six years ago, my goal was to identify companies with a track record of raising their dividends and a strong probability of continuing to do so. I’m pleased to report that the portfolio continues to execute its primary mission faithfully.

At inception, the portfolio was generating a projected $4,094 of income annually, based on dividend rates at the time. Thanks to scores of dividend increases and regular reinvestments of cash to purchase additional shares, the portfolio is now throwing off about $7,413 of income annually – an increase of about 81 per cent.

As athletes like to say, it’s been a team effort. In 2023, 19 of the 21 securities in the model portfolio raised their payouts, the exceptions being two real estate investment trusts – SmartCentres REIT SRU-UN-T and Canadian Apartment Properties REIT CAR-UN-T. With interest rates falling, I expect that both REITs will eventually rejoin the dividend growth club.

The money in the model portfolio isn’t real, but I follow the same dividend growth strategy in my personal portfolio. I can tell you from experience that a growing stream of dividend income provides more than just financial benefits; it’s also a highly effective tonic during periods of market turbulence. When your dividend income is growing, it’s much easier to exercise the patience required to build long-term wealth, without panicking and doing something you might later regret.

Bank stocks are a great example. As a group, the banks tumbled about 20 per cent from last year’s peak in February to their lows in late October, as worries about credit losses, slowing loan growth and a possible recession hammered the sector. But investors who sold near the lows will surely be kicking themselves today, as bank stocks rebounded by nearly 20 per cent in December alone. What’s more, all four banks in the model portfolio – Bank of Montreal BMO-T, Canadian Imperial Bank of Commerce CM-T, Royal Bank RY-T and Toronto-Dominion Bank TD-T – raised their dividends when they announced fourth-quarter results.

Now for a couple of predictions for 2024. First, although forecasting stock prices is a risky exercise, I’ll go out on a limb and say that dividend companies will continue to benefit from the downward trend in interest rates. In addition to lowering borrowing costs for REITs, utilities and other companies that carry a lot of debt, falling rates typically lead to higher valuations for dividend stocks as investors switch out of fixed-income securities.

My second prediction – and one I’m even more confident making – is that dividends in my model portfolio will continue to rise. Based on historical patterns, I expect that we’ll be seeing dividend increases in the first quarter from BCE Inc. BCE-T, Brookfield Infrastructure Partners LP BIP-UN-T, Canadian Utilities Ltd. CU-T, Restaurant Brands International Inc. QSR-T and TC Energy Corp. TRP-T, with many more companies to follow during the balance of 2024.

None of these dividend increases alone will make you rich. But if you stay invested through good times and bad and reinvest your dividends regularly (assuming you don’t need the cash), over the long run you will likely be very pleased with the results.

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.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 27/05/24 4:00pm EDT.

SymbolName% changeLast
CAR-UN-T
CDN Apartment Un
-0.58%44.43
BMO-T
Bank of Montreal
+0.26%130.82
CM-T
Canadian Imperial Bank of Commerce
+0.05%66.42
RY-T
Royal Bank of Canada
+0.16%144.15
TD-T
Toronto-Dominion Bank
-0.4%76.97
BCE-T
BCE Inc
+0.28%46.02
BIP-UN-T
Brookfield Infra Partners LP Units
+0.68%41.43
CU-T
Canadian Utilities Ltd Cl A NV
-0.22%31.5
QSR-T
Restaurant Brands International Inc
+0.7%92.94
TRP-T
TC Energy Corp
+0.25%52.56

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