Scotiabank strategist Simone Arel detailed some great news for domestic dividend investors in a Wednesday research report and provided reasons to think more lucrative income opportunities are on the way.
Ms. Arel noted that the TSX year over year dividend growth rate increased by 9.5 percentage points relative to the first quarter of 2021. Fully 70 companies have increased their payout so far this year compared with 43 a year ago. Scotia notes that these positive numbers likely understate the bullish income trend, as it does not include examples where dividend hikes have been announced but have yet to start.
Analysts have been raising dividend forecasts since the summer of 2021 and consensus expectations point to an 8.7 per cent increase in 2022 for the index as a whole and a further 6.0 per cent in 2023.
The additional dividends would increase the payout ratio – the share of earnings sent to shareholders – to 41 per cent for 2022 and 40 per cent in 2023. Both of these figures are well below the historical average of 49 per cent, leaving ample room for dividends to rise even further.
The strategy team at Scotia believe the current inflationary environment makes dividend payouts more important than ever. In a research note this month titled Revisiting the 1970s in Charts, Scotia emphasized the benefits of dividend growth during that inflationary decade. The TSX generated an annual simple return of 5.9 per cent between 1969 and 1979, but investment profits on the benchmark were a much more satisfying 10.4 per cent once dividends were included.
So far, dividend growth has been centred in the energy, materials and financial sectors but investors can look for the trend to spread to market sectors where payout ratios are lower than the historical average.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Tesla Inc. (TSLA-Q) When Tesla announced on Monday that it will request shareholder approval for a stock split – effectively increasing the number of shares outstanding and decreasing the price at which each share trades – the stock soared as delighted retail investors piled in. Yet, it came as a bit of a head-scratcher as to why, because there is no fundamental change in the value of a stock when a company finalizes a stock split. David Berman went looking for possible explanations.
Pet Valu Holdings Ltd. (PET-T) Shares of Pet Valu began trading on the Toronto Stock Exchange in June 2021 with an initial public offering price of $20. The stock price is now over $30, driven higher by strong financial results and the trend of Canadians taking home more pets during the pandemic. A dramatic rise in the stock’s dividend probably hasn’t hurt either. The Globe’s Jennifer Dowty had a fireside chat with CEO Richard Maltsbarger about the company’s financial results, supply chain challenges and growth plans.
RF Capital Group Inc. (RCG-T) Shares in this financial stock were up nearly 900% on Wednesday morning - but the Contra Guys, who hold the stock, weren’t celebrating. The company just completed a reverse stock split, so this had been in the cards. And RF Capital’s recent financial results and string of controversial corporate transactions points to more troubles ahead, as they explain.
Short sales on the TSX: What bearish investors are betting against
Short sellers have trimmed their bearish bets on the direction of the Toronto Stock Exchange, reports Larry MacDonald, who details which stocks are seeing the largest increases and decreases in short interest.
‘Mystifying’ U.S. stock rally defies economic unease
As a stunning rebound in U.S. stocks charges on, investors are questioning how long the surge can continue in the face of a hawkish Federal Reserve, warnings of recession from the bond market and geopolitical uncertainty. As Lewis Krauskopf of Reuters reports, plenty of investors are suspicious of the rebound.
Four years after ‘Volmageddon’, new volatility ETFs to hit market
Two new funds that let investors place bets on stock market gyrations are expected to launch this week, potentially filling the void left by the implosion of similar products four years ago. Saqib Iqbal Ahmed of Reuters reports.
Buoyant bitcoin helps crypto market cruise past US$2-trillion
As a bleak first quarter draws to a close, crypto seems to have the wind in its sails. It has pushed through the US$2-trillion barrier and is proving surprisingly resilient amid global chaos.
Others (for subscribers)
Wednesday’s Insider Report: Chair invests in this surging food infrastructure stock that’s up 39% in 2022
Tuesday’s Insider Report: Eric Sprott invests over $3-million in this penny stock
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Ask Globe Investor
Question: I hold units of H&R Real Estate Investment Trust (HR.UN) in an account with the REIT’s transfer agent. In January, I received one unit of Primaris REIT (PMZ.UN) for every four units of H&R as part of H&R’s spinoff of Primaris. These new units were put in my account at zero cost. I plan to either sell the Primaris units or transfer them into my tax-free savings account. My question is, what do I use for an adjusted cost basis?
Answer: If you refer to H&R’s fourth-quarter earnings release dated Feb. 14, you’ll find the following on Page 7: “Unitholders’ ACB of their [H&R] Units should decrease by 27 per cent as a result of the Primaris Spin-Off. Conversely, unitholders’ ACB of the Primaris REIT units issued on December 31, 2021, should initially be 27 per cent of the unitholders’ former ACB of Units immediately prior to the Primaris Spin-Off.”
Got that? Let me explain it with an example: Say the ACB of your H&R units was $10,000 before the spinoff. The ACB of your new Primaris units would be $2,700 (27 per cent of $10,000). The ACB of your H&R units would fall to $7,300 ($10,000 minus $2,700).
Another important thing to note is that H&R made a year-end special distribution of 73 cents per unit, of which 10 cents was paid in cash and 63 cents was a non-cash capital gains distribution (also known as a reinvested or “phantom” distribution). Investors should increase the ACB per unit of their H&R units by the amount of the non-cash distribution “prior to the apportionment of ACB to Primaris REIT units,” H&R said.
I suggest you contact the transfer agent to ask why the cost basis of your Primaris units is shown as zero.
Finally, remember that, whether you sell your Primaris units or transfer them to your TFSA, you’ll have to pay capital gains tax if the market value of the units at the time of the sale or transfer is higher than your ACB.
--John Heinzl (E-mail your questions to email@example.com)
What’s up in the days ahead
Brenda Bouw finds out what money manager Sadiq Adatia has been buying and selling amid this month’s volatile markets.
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Compiled by Globe Investor Staff