Let’s get the bad news out of the way first.
Like the rest of the stock market, my model Yield Hog Dividend Portfolio had a rocky year in 2018. As I was preparing to head off for the holidays, the model portfolio was down about 5.8 per cent for the year. Ouch.
The good news? The portfolio’s loss, as measured through Dec. 21, was about half of the 11.5-per-cent drop for the S&P/TSX total return index. (All figures include dividends.) So, on a relative basis, I made out alright.
Now for some even better news: Just as I had predicted a year ago in my 2018 outlook, the vast majority of stocks in my model portfolio hiked their dividends, and several did so more than once. A&W Revenue Royalties Income Fund (AW.UN), Bank of Montreal (BMO), Royal Bank (RY), Canadian Imperial Bank of Commerce (CM), Manulife Financial Corp. (MFC) and Telus Corp. (T) all announced multiple increases.
Thanks to these and other hikes – plus the compounding effect of regular dividend reinvestments – my model portfolio’s income grew steadily throughout the year. It’s now generating a projected $4,707 of annualized income (based on current dividend rates), up 15 per cent since from $4,094 at the portfolio’s inception. Dividend growth is the portfolio’s core mission, and in that regard it’s been an unqualified success.
Now, what to expect in 2019? Well, predicting how the stock market will perform in any given year is a fool’s errand. With trade disputes, turmoil in Washington and rising geopolitical tensions adding to the uncertainty, forecasting the short-term direction of major indexes would be just be guesswork.
I’ve never made stock market predictions before and I’m not going to start now. What I can say with a high degree of confidence is that most of the companies in my model portfolio will – barring some sort of global catastrophe – continue to raise their dividends in 2019, regardless of what happens to their stock prices.
I’ll even go a step further. For investors with a long-term horizon, I believe that now is a good time to shop for high-quality dividend stocks that have been caught in the market downdraft. Why? Two reasons: A lot of the bad news about trade wars and rising interest rates is already baked into stock prices, and dividend yields are higher now than they were a few months ago.
Here’s another reason to be optimistic about dividend stocks: Bond yields may have already peaked. The yield on the 10-year U.S. Treasury, for instance, had slipped to about 2.8 per cent in the days before Christmas, down from more than 3.2 per cent in early November. Canadian government bond yields are also well off their highs.
With many economists expecting the U.S. economy to slow in 2019, and some even predicting a recession in the next year or two, bond yields could remain under pressure. That’s good news for interest-sensitive dividend stocks such as utilities and power producers, in particular, whose share prices often move in the opposite direction to government bond yields.
“Throughout 2018, many were investing more cautiously in the [power and utilities] sector; however … we believe this tune has shifted a bit exiting 2018 as the risk of a looming recession has become heightened, casting doubt on the extent of future rate hikes,” analysts Bill Cabel and Brent Stadler of Desjardins Securities said in a note.
Desjardins’ top picks in the sector are Algonquin Power & Utilities Corp. (AQN), Boralex Inc. (BLX) and Northland Power Inc. (NPI), all of which offer solid earnings growth prospects, the analysts said.
Investing in high-quality dividend growth companies is an excellent strategy in any market environment, but during periods of turmoil investors may be especially glad to receive the steady cash flow that dividend companies offer.
“Many of the areas that have held up during prior declines have paid meaningful dividends. Dividends offer steady return potential when stock prices are volatile and can be a hallmark of a disciplined, conservative management team,” U.S.-based Capital Group said in its 2019 outlook.
“But not all dividend payers are equal. The key is to identify companies with strong balance sheets, good cash flows and the discipline to maintain dividend payments during declines.”
Those are precisely the kinds of companies I have included in my model Yield Hog Dividend Growth Portfolio. Over the past few months I’ve been building up the portfolio’s cash reserves, and in 2019 I’ll be putting some of that money to work – and taking advantage of the bargains that are out there.
The author owns shares of AW.UN, BMO, RY, CM, MFC, T and AQN personally and in his model Yield Hog Dividend Growth Portfolio.
John Heinzl