Investors are worried about their dividend stocks. Canadian dividend payers lagged the market in the recent downturn and companies are starting to trim their dividends.
But low share prices offer the prospect of reasonable returns to long-term dividend investors.
I’ll put the current collapse into context by starting with the returns of the Canadian stock market. It fell 18.7 per cent over the three months through to the close of May 14 based on the returns of the S&P/TSX Composite Index, not including dividends. The period spans the market crash. It includes the late February high, the low in March and the partial rebound of recent weeks.
The market index is heavily influenced by its largest stocks. To get the pulse of broader market, I looked at firms with their primary listing on the TSX that have market capitalizations in excess of $100-million. Some 469 stocks pass the test (based on data from S&P Capital IQ) and make it into what I’ll call the all-Canadian portfolio. Of those stocks, 253 of them pay dividends and are placed in the Canadian dividend portfolio. In each case the portfolios hold an equal-dollar amount of each stock.
The all-Canadian portfolio lost an average of 18.3 per cent over the three months to the close of May 14. Dividend investors fared worse. The dividend portfolio gave up an average of 23.4 per cent over the same period. Both returns include reinvested dividends.
The pain hit some sectors harder than others. The energy, consumer discretionary and real estate sectors gave up more than 30 per cent on average. Industrials, financials (popular among dividend investors) and communications services fell by more than 20 per cent. Consumer staples fared relatively well with a loss of 6 per cent while materials climbed 4 per cent – owing largely to gold stocks.
The accompanying table breaks down the two portfolios by sector and highlights their returns and average yields.
The average yield for the all-Canadian portfolio clocked in at 2.7 per cent. The dividend portfolio sports an average yield of 4.9 per cent, which is pretty good in a low interest-rate world.
Twenty-four dividend payers – including 11 real estate investment trusts – offer yields in excess of 10 per cent, which should be viewed with some skepticism. Their shareholders would be wise to brace themselves for the possibility of dividend reductions – or even eliminations – over the next few quarters. It’s usually better to aim for generous rather than extreme yields.
I encourage companies that decide to cut their dividends to adopt variable dividend policies linked to the firm’s ability to pay dividends. Doing so should reassure investors that the payments will resume in good times while alleviating the pressure on the company to pay in bad times when cash is scarce.
Norbord Inc. (OSB) provides a good example. The Canadian maker of wood-based panels enjoyed good times in 2018 as sales swelled. It paid a quarterly dividend of 60 cents a share in 2018 and sent a special dividend of $4.50 a share to investors in September. Its earnings declined in 2019 and its quarterly dividend fell to 40 cents a share and then to 20 cents in December. The quarterly dividend was recently reduced to 5 cents a share. Shareholders might not be happy with the trend, but they didn’t panic when the dividend was reduced.
I’ve seen far too many Canadian companies persist in paying dividends in past downturns despite suffering from significant economic stress. Some of them never recovered. I’d rather firms survive to live another day than have them send out a few dividend cheques. Frankly speaking, more firms should suspend their dividends today to boost their odds of surviving this year.
While times might look grim for dividend investors, they should keep in mind that some of the hardest hit firms, and sectors, will likely bounce vigorously off the bottom when the market turns. While I don’t know whether we’ve hit the bottom yet, it’s easy to be far too pessimistic when the economy runs into trouble and prices are low.
Norman Rothery, PhD, CFA, is the founder of StingyInvestor.com.
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