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August 22, 2018 | Sam Rook


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The Rising Tide of Dividends

                Some interesting data out of Janus Henderson Global in the US on the state of dividend payments worldwide- Cole’s Notes version: they are booming! https://az768132.vo.msecnd.net/documents/116459_2018_08_16_09_58_51_410.gzip.pdf

 

                Dividends worldwide were up nearly 13% in the second quarter with payments now totaling $497 billion in US dollar terms. Twelve countries had new records in total dividends paid last quarter. It has been an incredible bull market in dividends which has not often been reported but has contributed to overall returns since the financial crisis. [Side note: Do we capitalize Financial Crisis? Is it an actual title of something or just a description used? I don’t know]

 

                Rising dividends is a huge positive for investors both big and small but as I deal with more of the “small” in that equation, it is especially good news for my clients. Here is why:

 

  1. Increasing income helps offset the impact of inflation- this is the big one and it is going to have more importance now that we have inflation starting to rear its head. The last US Consumer Price Index was measured at 3% and the Canadian data for July put us at 2.9% annualized.  Inflation has a deleterious effect on your lifestyle spending unless you can offset it with rising income. Workers will benefit from better earnings but retirees need rising dividends to help them out. Take a look at this chart from the Janus Henderson publication. Globally, dividends are nearly 80% higher now than they were in 2009. In North America they have more than doubled. That is real protection from inflation.
     


 

  1. Dividends as a form of prudent financial management- this is for the companies that pay dividends. Paying a portion of your income to shareholders has long been viewed as a sign of stability; hence the term “blue chips” for stocks that pay good dividends. Buybacks are also hugely positive for share owners but a dividend typically attaches a longer term commitment than a buyback. A buyback can be stopped when a company thinks it is not the right time and the market will likely shrug it off. Cut a dividend though and you get punished severely. If you ever need an example of this check out the chart of General Electric stock in the past 2 years. It’s definitely NSFW. GOOD companies won’t commit to a rising dividend just to cut it later. The pain to their share price is too awful to bear.


     
  2.  Dividends are a huge portion of overall returns- this is for younger investors. Often we are told to have a growth mindset when we are young and an income mindset when we retire. Too often that leads us to ignore good companies that paying an increasing dividend, a dividend that can reinvested to buy more shares to compound your return. Dividends being reinvested to buy more can have a massive impact on your growth. This chart from Hartford Funds of the S&P 500 says it all:
     


 

 

                One caveat to all of this. NEVER. PICK. THE HIGHEST. DIVIDEND. PAYOR. Invest in companies that grow their business too. That helps you in the long run as their earnings increase leaving more to pay for dividends but also a better business which will appreciate in value as well. Check the underlying business and the reasons for the dividend payout. Those will tell you if you are getting a protection against inflation or the next dividend darling about to be GE’d into smithereens.