Wither, Dividends?

Apr 13, 2020 | Sam Rook


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Pondering their short term future

Here is a really important question for a lot of investors in Canada. What do you do if your dividend income stops for a short while? I don’t mean a small drop of 5%. I mean what if, like in much of Europe right now, the banks are forced to withhold any dividend payments to conserve their cash? Almost every investor portfolio in Canada holds some portion of bank equity either outright or through a product like a mutual fund or ETF. I think this is a really important discussion to have right now. Here’s why.

 

The rankings of the top mutual funds by assets in Canada are filled with Dividend or Income style funds. In Canada, we don’t just love dividend income, we ADORE it. We are at the “you can pry them from my cold hands” level of attachment to dividend paying equity. It’s not just the bank stocks. It’s also our utilities and pipelines and, in good times, our mining companies. We were so infatuated with regular income that we even turned the REIT structure into a viable structure for all companies and called it an “Income Trust”. Remember those days of income trusts?

 

Don’t get me wrong, dividends have shown to be meaningful drivers of total returns for shareholders. Just look at this graph taken from a Money Sense article from 2017. Who wouldn’t want that orange line’s returns for their portfolio?

(Source: https://www.moneysense.ca/save/investing/stock-market-doing-better-than-you-think/ )

 

The benefits of dividends to investors shall remain strong when we return to normal times. Here’s the catch. We aren’t in “normal times” and likely won’t be for several months. Whole businesses are staring down the potential for months with a revenue figure close to zero. Many more will see significant revenue declines now followed by a slow rebound even after we are all allowed out of our homes. No business of any size has EVER done a forecast using a “we have no revenue” scenario. Just the idea of it still seems far-fetched to me so imagine how it would have seemed 6 months ago when most forecasts were being built in boardrooms across the country.

 

This Bloomberg piece does a great job at breaking down the uncertainty facing all companies. Many long-storied “Dividend Aristocrats” are going to have a very serious look at all of their business decisions, dividend payouts included. In a world sheltering away from a storm of this magnitude and duration, the responsible thing to do is to protect your business in the best way possible. In many instances that means hoarding as much cash as possible to survive. Each company will have their own needs so it isn’t going to be a cut and dried answer for anyone. As an investor it will be doubly difficult because you won’t have the “in the moment” financial figures to make a truly informed decision.

 

I do think there will be dividend reductions and suspensions coming over the next few months. I think we will be surprised by companies that reduce dividends and also companies that maintain dividends. Certain sectors are going to be disproportionately impacted compared to others. I’m not calling out any specific company or sector but I believe we all need to have this mindset when looking at our portfolios. Be prepared, as the Boy Scouts motto goes.

 

Possibly the worst thing you can do right now is to hold on to an investment “for the dividend” without considering how stable that dividend may be in a world of zero revenue. Banks, utilities, pipelines and the other dividend payers won’t disappear. However, the outcomes within these industries won’t be evenly distributed coming out of this and the companies that survive will be the ones that thrive in the next stage. They will be the companies that can raise dividends or reinstate dividends first and that’s how you get meaningful compounding of your wealth over extended periods of time. So don’t focus on the dividend, focus on the business stability. That’s always been the case, it’s just much more important now.