Rob Carrick
It's time to unlearn a dividend investing lesson of the past five years.
You cannot depend on cyclical stocks – those tied to a strong economy – for dividend growth. Yes, these stocks have delivered some very solid dividend gains in the past five years. But the reliability of these dividends is in no way comparable to the banks and utility and pipeline stocks that are the stars of dividend-growth investing.
The precariousness of dividends paid by cyclicals was highlighted in early December when Canadian Oil Sands announced a 43-per-cent reduction in its payout. With oil prices plunging, COS could soon be joined by other energy producers in paying out less to shareholders to conserve cash.
COS shareholders saw their quarterly payout rise from 20 cents in early 2011 to the 35 cents paid through 2012 to 2014. Now, the payout will fall back to 20 cents. We've seen this sort of thing happen before with stocks issued by cyclical companies. COS itself slashed its dividend when oil prices collapsed during the financial crisis of 2008-09.
Another resource stock that chopped its dividend back then was Teck Resources. Russel Metals is an example of an industrial that trimmed its dividend as a result of the economic slowdown that accompanied the crisis. Both stocks have bumped up their dividend several times since the cut, but the lesson of the past remains. When you own a cyclical stock, the dividend isn't forever.
Of course, a few blue chips have cut their dividends, too. Manulife, Telus and TransCanada are prime examples of the past 15 years or so. But if dividend income and dividend growth are your goal, avoiding stocks in the materials and energy sector is a good policy.
A simple way to gauge any company's commitment to its dividend is to look at the dividend history section of its investor relations webpage. Look at how often the company has historically tended to increase its dividend and see if there has been a slackening lately. More importantly, look for previous dividend cuts or long period where the payout was not raised.
The past five years have given us a false sense of how reliable cyclical and commodity stocks are for dividend growth. If you're looking for long-term growth you can count on, there are better buys out there.