As the final days of 2018 were counting down and investors were bemoaning December’s market collapse, I wrote a column with the headline: “Why 2019 Could Be a Good Year for Dividend Lovers."
I didn’t know it would be this good.
With the U.S. Federal Reserve adopting a more dovish tone on interest rates and many dividend stocks looking downright cheap after the December nosedive, my model Yield Hog Dividend Growth Portfolio has been on a tear in 2019. Through Feb. 4, the portfolio posted a year-to-date total return of 8.5 per cent.
Now, hold your applause for a moment. The portfolio actually trailed the S&P/TSX Composite Index by about half a percentage point in that time, but I’m not complaining. Since its inception on Sept. 30, 2017, the model portfolio’s return of 8.2 per cent is still more than double the return of the benchmark index. (All returns cited here include dividends.)
Whether such outperformance will continue in 2019 remains to be seen, but I’m optimistic.
Why? Well, for starters, interest rate expectations have moderated considerably, reducing one of the main headwinds dividend stocks had been facing.
When the Fed held its benchmark interest rate steady at its Jan. 30 meeting, the central bank went out of its way to reassure investors that it will be “patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.”
The Fed’s message was heard loud and clear.
Futures markets are now pricing in more than a 90-per-cent probability that the Fed will leave rates unchanged through the first 11 months of 2019, and an 88-per-cent probability that the Fed will remain on hold through its final 2019 meeting in December.
Incoming economic data could change the interest-rate outlook, but in Canada bond yields have also cooled off dramatically. The five-year Government of Canada bond now yields about 1.86 per cent – down from more than 2.4 per cent in November – which makes the higher yields on many dividend stocks look attractive by comparison.
Another reason I’m optimistic is that companies continue to raise their dividends.
In January, my model portfolio was the beneficiary of an 11.1-per-cent hike from Restaurant Brands International Inc. (QSR) and a 7.5-per-cent increase from Canadian Utilities Ltd. (CU). This followed increases in December of 10 per cent from Enbridge Inc. (ENB) and 4.2 per cent from Bank of Montreal (BMO).
February is likely to be an even more bountiful month for dividend hikes, as TransCanada Corp. (TRP), Brookfield Infrastructure Partners LP (BIP.UN) and BCE Inc. (BCE) all typically announce increases along with their fourth-quarter results in February.
I track the dividend income that my model portfolio generates, and it’s been rising steadily. Thanks to a combination of dividend increases and regular dividend reinvestments, the portfolio is now throwing off a projected $4,792 of annual income (based on current dividend rates). That’s up a very healthy 17 per cent from $4,094 when the portfolio was launched with $100,000 in virtual dollars. As of Feb. 4, the portfolio was valued at $108,242.
Enrolling stocks in a dividend reinvestment plan (DRIP) is a great way to make the reinvestment process automatic. However, in my model portfolio – and in my real-life accounts – I prefer to let my cash build up and then decide how to reinvest it. This gives me more control over the process.
This leads to the final reason that I think dividend stocks are a good place to be in 2019: Even after the recent surge in stock prices, yields on many dividend stocks remain attractive. In my model portfolio, for example, six of the 22 securities still yield more than 5 per cent. That compares with a yield of about 3 per cent on a five-year guaranteed investment certificate. Granted, one has to accept short-term capital risk with dividend stocks, but over the long run a company’s stock price should rise if its earnings and dividends are growing.
With lots of juicy yields to choose from, I’ll be back in a future column to spend some of my model portfolio’s cash – and give my portfolio’s income yet another boost.
Disclosure: The author also personally owns the securities that comprise the model Yield Hog Dividend Growth Portfolio (tgam.ca/dividendportfolio).
John Heinzl