Thursday, October 23, 2014

Money Show 2014 - Peter Hodson

The fifth speaker in the Opening Remarks was Peter Hodson who is editor of the Canadian Money Saver Magazine. His talk was entitled "Dividends Rule (and Dividend Rules)".

You do a little bit of work and invest some money and then get money back every 3 months plus get a raise each year. This is dividend investing and it is a miracle.

What is going on currently is a normal market correction. When will the current bull market end? No one knows.

There are chicken farmers and egg farmers. The chicken farmer worries about the price of chickens and the price of eggs. The egg farmer worries about the prices of eggs. If you are an investor in dividend stocks you are like the egg farmer.

Dividend stocks offer safety in down markets especially by dividend growth companies. What you want to do is do your homework before investing. You do not want to invest in a company that will fail and cut their dividends.

One of the best signals for a growing company is that they start to pay a dividend. This tells you that the company is doing fine and plans to be around for a long time. An example is Stantec Inc. (TSX-STN). This company started to pay a dividend after 50 years in business. They are not going to cut the dividend at the first downturn.

What you want are companies that can grow their dividends. Be cautious about any company with a high debt. A company that has lower revenue year after year is also bad. You want a company that grows its revenue. Dividend paying stocks outperform non dividend paying stocks. There are also several Canadian Dividend ETFs to choose from.

One notable dividend stock is Constellation Software (TSX-CSU) which started dividends at $0.15 per share per year in 2007 and is now paying dividends of $4.00 per share per year.

Peter thinks there are 5 reasons that dividend stocks are good. They are:
  • Dividends prevent investors from selling a stock.
  • Dividend paying stocks are more stable.
  • Paying dividends provide management with discipline.
  • Dividend paying stocks get a better market valuation.
  • Dividend paying stocks outperform other stocks.
Management needs to pay dividends out of cash flow and this is what ensures management discipline. You are better off with investing in a company with the discipline of dividends than without the discipline of dividends.

A dividend increase followed by a big market decline is a good sign. Here yield goes up but the risks decline. For example, Surge Energy Inc. (TSX-SGY) had a dividend increase on June 16 just prior to the sector decline of the past 3 months. The dividend yield is now 9%. Here the yield is up but the market is down and nothing has changed with this company. Also, for pipeline stocks nothing has changed but the market has gone down on these shares.

What are good dividend signs?
  • A company starts to pay the first dividend ever.
  • Dividend payments are made on small and mid-cap stocks.
  • The dividends do not start too high.
  • There is management ownership and they are paying themselves with dividends rather than salary.
Another good sign is consistent dividend increases. Fortis Inc. (TSX-FTS) has increased its dividend each year for the past 41 years. Slow and steady dividend increases are the best. You need to watch dividend payout ratios. Look at the payout ratios for cash flow not earnings. One problem would be for REITs where they are paying out more than 60% of cash flow. Use caution here.

Some companies increased their dividends during the last recession. Home Capital Group's (TSX-HCG) dividend went from $0.055 per share quarterly to $0.08 in the last recession. Telus Corp's (TSX-T) dividend increased from $0.1875 per share quarterly to $0.2375 between 2007 and 2009.

A strong balance sheet and cash on hand makes a dividend more secure. Wi-Lan Inc. (TSX-WIN) has lots of cash on hand. At the last financial statement year there was $1.44 cash on hand for each share which was some 32% of the stock price.

A bad sign is a dividend payout ratio of 80 to 90% of the cash flow. This leaves little in the way of cushioning. Cyclical companies should have lower payout ratios. Also companies with debt should have lower payout ratios.

DRIP's are not always good. Some companies add DRIPs to conserve cash. They may not have enough cash to pay their dividends. You need to include the DRIP dividend when calculating payout ratios. This is because DRIPs can be cancelled at any time by investors.

Watch out for companies that increase dividends in the face of earnings decline. He calls this the Fake Out. The company is trying to prop up a stock. An example of this is Horizon North Logistics (TSX-HNL). They raised their dividend in the face of an earnings decline. This is bad.

What also is bad and bears repeating is when a stock goes down but the whole market does not. When a company has a high yield almost always this is a significant sign. The exception is when there is a major market decline which will raise all dividend yields.

Examples of high yields being bad are Data Group Ltd. (TSX-DGI) and Twin Butte Energy Ltd. (TSX-TBE). Data Group Ltd had a yield of 20% and now the stock is down 70%. Twin Butte Energy has a yield of 13% and high debt and operational concerns. A 3% dividend yield will not make up for a 60% capital loss.

There is almost never just one dividend cut. Ignore what the management says. Atlantic Power (TSX-ATP) cut the dividend twice. Management does try to control stock price declines.

Dividend growth stocks beat high dividend yield stocks. Dividend ETFs have lot of stocks and if one or two cut their dividends, the ETF will do fine. However, if an investor has a few stocks and one or two cut their dividends, this can be a real problem.

In building a portfolio you need to diversify by
  • Sector
  • Geography
  • Market cap
  • Style of Management
  • Dividend payment cycles
  • Add some high payers
  • Add dividend growth stocks
Exchange Traded Funds (ETF) to consider are Vanguard Dividend Appreciation (NYSE-VIG); iShares S&P/TSX CDN Dividend Aristocrats (TSX-CDZ); Vanguard US Div. Appreciation (NYSE-VGG) and iShares US High Dividend Equity (TSX-XHD).

On my other blog I am today writing about The North West Company (TSX-NWC, OTC-NWTUF) ... continue ...

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. I do research for my own edification and I am willing to share. I write what I think and I may or may not be correct.

See my site for an index to these blog entries and for stocks followed. Follow me on Twitter.

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