The most important thing for retirees depending on dividend stocks is, well, dependability.
Those dividend stocks have to deliver every quarter or month to provide needed income. But what about the investment case for emphasizing stability when choosing dividend stocks? Can you get decent returns along with the comfort of knowing you own the shares of companies that are well positioned to keep paying dividends?
The answer is yes, if we judge by a 10-stock portfolio of Canadian and U.S. companies that was created for this column at the end of last year by the people at the Dividend Advisor newsletter (it's published by TSI Wealth Network, which also produces The Successful Investor). The stocks posted an average price gain of 7.9 per cent from Dec. 22 through Oct. 23, which is roughly double the S&P/TSX composite index's gain over the same period.
More importantly from the retiree's point of view, the 10 stocks delivered a solid increase in dividend income. The average yield for the 10 stocks was 4.6 per cent. The biggest contributions came from Algonquin Power & Utilities and Toronto-Dominion Bank, where the dividend rose 12.6 per cent and 9.1 per cent, respectively. Three of the 10 stocks did not raise their dividend over the period examined, and none cut their payout.
In addition to Algonquin and TD, the 10 stocks in the portfolio are BCE Inc., Chemtrade Logistics Income Fund, RioCan REIT, Extendicare Inc., the North West Co., Pfizer, McDonald's, Procter & Gamble. The average yield for this group last December was 4.4 per cent, which reflects the mix of blue chips and smaller, riskier companies. Chemtrade, for example, had a yield of 6.3 per cent.
As of October, the average yield on this group of stocks was basically unchanged at 4.3 per cent. As noted in a recent column, rising dividends tend to help propel share prices higher. Combine a higher dividend and share price and you get a stable yield.
The lesson here with respect to dividend dependability is that you shouldn't have to settle for stable payouts alone. The companies best positioned to keep paying dividends also frequently have the wherewithal to increase their payouts.