John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
The numbers prove it: These are good days to be a dividend investor.
First, let's look at the big picture with the help of a recent global study of dividends. Then we'll zoom in on how the Strategy Lab model dividend portfolio has been performing.
In both cases, there's plenty for dividend investors to like.
According to Henderson Global Investors, a London-based asset management firm that tracks dividend payments, companies worldwide paid out a record $1.167-trillion (U.S.) to shareholders in 2014 – up 10.5 per cent from 2013.
This is just the latest in a string of solid years. Since 2009, the year the financial crisis ended, the value of dividends paid globally has soared nearly 60 per cent as cash-rich companies share more of their wealth with investors.
Alex Crooke, head of global equity income for Henderson, called 2014 "a superb year for income investors, with developed markets leading the charge."
U.S. firms were the biggest driver of dividend growth, paying out roughly $52-billion – or 17 per cent – more than they did in 2013. Only one U.S. sector – mining – cut dividends, while all the others distributed more cash "as rapid growth in the U.S. economy fed through to company earnings," the study said.
The firm didn't provide data specifically for Canada, but if Strategy Lab's model dividend portfolio is any indication, Canadian companies are also putting a lot more cash into investors' pockets.
The 11 stocks that were in the model portfolio in 2014 (two have since been sold, and one added) paid about 8 per cent more in dividends, on average, than they did in 2013. The sole exchange-traded fund in the portfolio – the iShares S&P/TSX Capped REIT Index ETF (XRE) – has raised and lowered its distribution frequently, but the general trend has been up.
As good as last year was for the model dividend portfolio's cash flow growth, 2015 could be even better.
Late in 2014, pipeline operator Enbridge Inc. hiked its dividend by a bigger-than-expected 33 per cent as part of a major restructuring. Then, in February, fellow pipeline company TransCanada Corp. raised its dividend by 8.3 per cent, making good on a pledge last fall to roughly double its dividend growth rate. Bank of Montreal, Royal Bank of Canada, Fortis Inc., Canadian Utilities Ltd. and BCE Inc. all have announced dividend hikes in the past few months as well.
I'm expecting more dividend increases soon. Johnson & Johnson and Procter & Gamble Co. – both of which have raised dividends annually for more than half a century – typically announce increases in April. According to Bloomberg estimates, J&J and P&G are expected to boost their payments by about 6 per cent and 7 per cent, respectively.
Among the model portfolio's Canadian stocks, I'm expecting Telus Corp. to announce a dividend increase in May, continuing the telecom company's stated policy of raising its dividend twice a year at an annualized rate of about 10 per cent.
Dividends are only one component of an investor's return; share price gains also matter, and in that regard the portfolio has also performed well.
Based the latest Strategy Lab performance update, from inception on Sept. 13, 2012, through the end of February, 2015, the model dividend portfolio produced a total return – from dividends and capital appreciation – of 42 per cent. That trails Strategy Lab's growth and value portfolios, but it's ahead of the model index portfolio. It also beats the S&P/TSX composite index's total return – also including dividends – of about 31 per cent over the same period.
One reason for the dividend portfolio's outperformance versus the S&P/TSX index is that the former has no direct exposure to commodity prices, whereas energy and materials make up roughly one-third of the S&P/TSX. So the dividend portfolio has been largely insulated from the massive drop in oil prices.
As the Henderson study points out, weak energy prices are expected to weigh on global dividend growth in 2015. The plunge in oil, combined with a stronger U.S. dollar and a softer global economy, will keep dividend growth to less than 1 per cent (measured in U.S. dollars) globally this year, the study predicts.
But based on the model dividend portfolio's strong start to the year, I'm confident it will beat that number handily. Remember that the model portfolio is not meant to be copied exactly; a properly diversified portfolio requires perhaps twice as many stocks, as well as fixed-income exposure. Do your own due diligence before investing in any security.
Disclosure: The author also personally owns shares of the model portfolio securities discussed.