Never Sleep on Your Holdings: The Risks of Ignoring Dividend Growth Stocks

A dozen years ago, dividend stars in the Canadian stock market included SNC-Lavalin, Shaw Communications, and Reitmans Canada.

Today, none of these companies are among the dividend-paying companies with the best growth rate in their quarterly cash returns to shareholders. Take a lesson, dividend fans. Never sleep on your holdings.

There are many things to like about investing in dividend growth as an investor, including protection against inflation. Many stocks have documented dividend increases at a compound annual rate that matches or even exceeds today’s elevated inflation rate of 6.3 percent. Blue chip dividend payers add stability to a portfolio. These companies have been around for ages, and many have been paying steady dividends throughout this time.

But high dividend growth rates are difficult to sustain. Algonquin Power and Utilities Corp. (AQN-T) is the latest example — the company recently announced a 40% cut from a dividend it’s consistently increased over the past several years.

In 2011, I wrote a column summarizing some of the dividend growth stars of the day. A number of listed stocks are still in good shape, including Canadian National Railway (CNR-T), Imperial Oil (IMO-T) and Metro Inc. (MRU-T). Each has increased its dividend by 10 to 12 percent on average annually over the past five years, according to Globeinvestor.

Others on the list of dividend stars of 2011 have faded. Some examples based on Globeinvestor data:

-SNC-Lavalin (SNC-T), which cut its dividend by 80% a few years ago and now yields just 0.3%.

-Reitmans Canada (RET-X), which suspended its dividend in 2020 during the pandemic lockdown.

-Shaw Communications Inc. (SJR-BT), which Globeinvestor says hasn’t increased its dividend in the last five years.

Some other dividend growth stars of 2011 have slowed their dividend growth to lower levels than before. An example is Saputo Inc., which had a compound annual dividend growth rate of 13.2 percent in 2011 and now has a five-year growth rate of 4.1 percent. Another example is AGF Management Ltd. (AGF-BT), which has grown from a five-year growth rate of 11.3 percent in 2011 to 4 percent.

Keep an eye on dividend growth stocks that are showing a slowdown in dividend growth, or take a pause on dividend growth. Less aggressive dividend hikes might be a sensible decision for a company, but an income-hungry shareholder might see things differently.

— Rob Carrick, personal finance columnist

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stocks to think about

CGI Group Inc. (GIB-AT) For companies that don’t produce oil or supply natural gas, 2022 was likely a tough year. Aside from energy, most of the TSX sub-indices lost ground. But some companies are thriving despite headwinds from inflation, rising interest rates, disrupted supply chains and the looming possibility of a recession. Quebec-based CGI is one of them. If you haven’t looked into it as an investor, now is the time, says Gordon Pape.

Hydro One Ltd. (HT) We’ve all been warned that some dividend yields can be too high, suggesting a payout is in danger of being cut. But can a dividend yield be too low? That’s a key question in the case of Hydro One Ltd., the Toronto-based utility, whose yield has fallen to about 3 percent in recent months — a record low — as its share price rose. Why take a risk with Hydro One when you can get a higher return with other stocks, guaranteed investment certificates and even money market funds? For David Berman, the bullish case for the utility is still compelling — but not enough to sustain the stock right now.

The Rundown

The cops are back. So the markets are dizzy again

The cops are back at the helm. Since the beginning of the year, equity markets have rallied, fueled by increasing signs that the global economy is in better shape than we feared a few months ago. After a stunningly dreadful 2022, the new wave of optimism is a welcome change for investors. But the sheer exuberance of the moves over the past few weeks begs the question of whether we are witnessing a rational reassessment of the market outlook or just another manic – and temporary – sentiment reversal. Ian McGugan looks at the arguments, pros and cons.

Also Read: Signs of Market Strength Cheer US Stock Bulls

Hedge funds are in a bigger bind than the meme stock frenzy of 2021: Goldman Sachs

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Bitcoin is on the rise again – should you buy it?

It’s been a good month for Bitcoin, which is up around 40 percent to reach $23,000. But is the rally built on real momentum? Is this the glowing harbinger of a new bull market? Probably not, says the Globe’s Ethan Lou.

My model portfolio is not dead – it just rested

One of John Heinzl’s New Year’s resolutions is not to leave a lot of money lying around and not to earn anything. So he reinvests most of the accumulated money in his exemplary Yield Hog Dividend Growth Portfolio. And for an update of the entire portfolio, click here.

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Globe consultant

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Ask Globe Investor

Ask: Will leaving TFSA in December give you additional posting space next year? Or would you just be back to the same overall limit you would have been at without a withdrawal?

Answer: Any withdrawals from your TFSA will be added to your contribution space on January 1st of the following year. For example, let’s say you maxed out your contributions every year, including 2022. You then decided to withdraw $5,000 in December (or any other month in the last year). Beginning January 1, your contribution space would increase by $5,000, plus the $6,500 limit applicable to all TFSA holders for 2023, for a total contribution limit of $11,500. If you also had unused contribution space from previous years, you would also add this to your contribution limit for 2023.

-John Heinzl (Email your questions to [email protected])

What’s going on in the coming days

Would you like to get additional returns from your bond portfolio? Tom Czitron will explain how provincial bonds can do just that.

For Globe Investor’s earnings and business news calendar, click here.

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