John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
Dividend growth is the foundation of my investing philosophy, both personally and in my Strategy Lab model dividend portfolio.
I buy companies that raise their dividends regularly – once a year is nice, twice a year is even better – and sit back and collect the growing income.
It's tough work, but someone's got to do it.
For now I'm reinvesting my dividends whenever a sufficient amount of cash builds up and I see a compelling opportunity (some people enroll in dividend reinvest plans, or DRIPs, which is also a great strategy). When I'm retired and I need the extra cash to supplement my pension income, I'll start spending my dividends.
Dividends don't grow in a vacuum, of course.
For a company to continue raising its payment, it must also have growing revenue, earnings and cash flow to support dividend increases. Otherwise, its payout ratio will rise and eventually the dividend will stop growing – or, worse, get cut or eliminated. Yellow Pages anyone?
For that reason, in my Strategy Lab model dividend portfolio (and in my personal portfolio), I focus on what I consider to be relatively stable businesses that will, barring some sort of calamity, continue to grow.
There will be bumps along the way for any business, of course, but the general trajectory will (fingers crossed) be up.
If something changes in the company's outlook or if I no longer have confidence that the business will continue to grow at an acceptable rate, I will consider selling the stock (as I did with two of my original Strategy Lab holdings, McDonald's and Coca-Cola).
I've been managing my Strategy Lab dividend portfolio since September, 2012, and I've been a dividend investor personally for more than a decade. Today I'll use the model portfolio's latest performance update (through March 31) to illustrate how the strategy is faring.
First, let's look at the growing income of the stocks in the model portfolio.
As you can see in the accompanying table, all 10 securities (nine stocks and one exchange-traded fund) that have been in the model portfolio since the beginning are now paying a larger dividend than they were at inception.
Most of these dividends are substantially higher. Enbridge's dividend, for example, is 64.6 per cent higher than it was just 2 1/2 years ago. Canadian Utilities' dividend has grown 33.3 per cent, Telus's dividend is up 31.1 per cent and Royal Bank's payment has grown by 28.3 per cent. The rest of the stocks, and the one ETF, have all increased their payments by double digits.
What's more, every stock has raised its dividend at least twice, and two (Royal Bank and Telus) have raised their dividends five times. (Note: The iShares S&P/TSX REIT Index ETF raises and lowers its monthly distribution frequently depending on its cash flow, so including the number of distribution increases would not be meaningful.)
Some readers will notice that I have not included Johnson & Johnson in the table. That's because I "purchased" J&J for the model portfolio in January and have not held it long enough to receive a dividend increase.
The health products giant has raised its dividend annually for 52 consecutive years and I will bet you a bottle of Johnson's baby shampoo that it will announce its 53rd increase later in April, in keeping with its well-established pattern.
I'm also expecting another dividend increase soon from Procter & Gamble.
Dividends are only one component of an investor's total return; the other component is capital growth, and my portfolio has delivered on that count as well.
As of March 31, the portfolio was worth $70,195.45 (virtual dollars), up 40.39 per cent from its starting value of $50,000 on Sept. 13, 2012. That works out to an annualized total return of about 14.2 per cent and it's significantly better than I would have done by investing in a broad and low-cost index ETF such as the iShares Core S&P/TSX capped composite index ETF (XIC), which posted a total return, including dividends, of 29.9 per cent over the same period, or about 10.8 per cent annually.
One key factor working in my favour is that, unlike the S&P/TSX index, I do not hold any energy producers, which have been clobbered by low oil prices. While I do have exposure to the energy industry through my pipelines, they are largely insulated from volatile energy prices.
As the numbers illustrate, the model dividend portfolio has done what it was designed to do: Deliver steady increases in cash flow and solid capital growth. I'm confident that it will continue to do so.
Disclosure: The author also personally owns the securities shown in the table.