Dividends

     Warren Buffett once said "the stock market is designed to transfer money from the active to the patient."  This is holds true in today’s market on so many levels.  One of our rules to investing is to let the market come to you rather that you chase the market.  This takes patience, but, it will eventually prove to be more profitable over the long run.

     Today’s market takes time to create buying opportunities.  In the meantime, we are constantly rewarded with cash dividends and a nice tax credit (if one qualifies) while we wait for bargains.  It is these dividends that end up creating a large chunk of ones overall returns.  This is evident on page 6 of our publication.

     There are a number of factors to look at before choosing a dividend paying stock.  Dividends are measured by yield, and are calculated by dividing the dividend into the share price.  The yield will tell an investor if the stock is properly valued, or if the dividend is at risk of being cut.

     A stock with a dividend that is at risk of being reduced, or cut all together, will trade a lower price causing the current yield to be abnormally high.  The price, at which the stock will fall to, tends to be the level the market believes the new dividend will deliver a competitive yield.  If the dividend is eliminated, the stock price tends to realize a substantial decline.

     As the chart of $25,000 invested below clearly highlights, the benefit realized by waiting for a higher yield is tremendous.  An investor who waits 4 years for a nice yield (5% in the chart) will make nearly 40% more than the investor who jumps right into the market in order to earn a 2% yield.

     Using the chart again, one who is able to wait for a severe market correction, which tend to occur nearly every 7 years, and gain a 7% yield will nearly double the gains in two-thirds the time compared to settling for the lower yield.

     When researching a company’s dividend, an investor should look at the following:

1.  Are dividends paid from earnings?
2.  Does the company have sufficient financial resources to cover liabilities as well as dividends?
3.  Is there a lengthy history of increasing the dividend?
4.  Is the company in an industry that offers price stability and low competiton?

     ***** has raised its dividend by 3 cents a share quarterly.  The company started paying dividends in 2006, and since then has raised the payout at least once every year.  Its financials today are rich enough that there could be another increase in 2013.  With over $50b in the bank, it is nearly a guarantee an increase will occur.

     ****** announced that it predicts its profits will grow by roughly 10-to- 12% a year for the next 5 years.  As a result, it will most likely increase the dividend each year accordingly.

     ****** is the major shareholder of *******.  In this relationship, ***** usually realizes part of their dividend increases from the subsidiaries.  This means that ***** will be increasing their payouts.  It has done so for 7 of the past 8 years.  ****** oilfield operations should be in full production within the next 3-6 months, meaning higher profits in the future, leading to more dividend increases.

     We have strongly recommended buying dividend paying shares since the inception of this publication.  More importantly, we tend to concentrate on companies that increase the payout on a routine basis.  There are plenty of these companies around.  Bay Street never recommends these stocks because it equates to only one commission since there is rarely any reason to ever sell them.

     Sometimes it becomes a hard decision to know when to sell.  Before the recent credit crunch and the collapsing real estate market, ******** and ********** had the best dividend growth record in the industry with 15 years of increased payouts.  We did not suggest selling ******** because we believe in the future of Canada.  Plus, the yield is still respectable.

     Both companies, as did others, have raised their payouts in 2012.  Will ***** and ****** be back in a race for the best record?  Let’s hope so.  It is worth noting that ******* has one of the best records in the world for paying a dividend, over 110 years.

     A key point to our system is that, based on our purchase price and after numerous dividend increases, our portfolio yield grows.  For example, ********* yields 12.1%; ******* 11.8%; ********* 6.5%, and so on.  Plus, these shares have made huge capital gains.  The 3 mentioned above have gained 136%, 100%, and 148%, respectively.

     Even companies that do not raise payouts on a regular basis hold up due to reasonable yields.  *******, ********, and ******** fall under this category.

     ****** used to have one of the better TSX dividend growth records.  However, they have stopped increases because, along with most companies in the industry, it is being hurt by the zero interest policy.  These company profits will increase with interest rates.  Once this occurs, the dividend increases will follow.

      Nobody knows the future, but history helps to guide us for tomorrow. It is telling us that we are in for a sustained period of flat growth.  As a result, most stock markets profits will be via dividends.  It has been proven, time and again, dividends must be part of any investment portfolio if it is to grow.