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Weekend Reading: Dividend Aristocrats Edition

Dividend investors tend to have an almost blind faith in the steadiness of companies in which they invest. They want to invest in businesses that have paid dividends for many years and, more importantly, have a track record of growing those dividends each year for decades or more. Reliable dividends mean never worrying about the stock price as long as the company continues to write quarterly cheques to its investors.

The crown jewel for dividend investors is the dividend aristocrats – a list of companies that have not only paid but also increased dividends annually for 25 years or more. It’s the perfect stock screen for large blue-chip dependable dividend payers. Investors believe that companies who belong to the dividend aristocrats must generate exceptional cash-flow and have prudent management that takes care of its shareholders.

But is it prudent for management to pay an ever-increasing dividend at the expense of growing their business through investments, research & development, or acquisitions? Or paying down debt?

Let’s face it, there must be times when it’s not smart to pay out all of your free cash flow to investors. And if management decides that paying dividends is its top priority just for the sake of staying on the dividend aristocrats list, well I’d say that’s the opposite of being prudent. Eventually poor decisions like that catch up with you.

Take the ultimate widow and orphan stock, General Electric, which recently cut its dividend to 1 penny per quarter. GE was a dividend darling, paying out shareholders every year since 1899. It had a stretch of 32 consecutive years of dividend growth, and was the largest company in the world from 1994-1998, and 2000-2005.

Another former aristocrat, Anheuser Busch cut its dividend in half amidst swelling debt of $109 billion after its acquisition of rival SABMiller.

As reliable as the likes of Johnson & Johnson, McDonald’s, Coke, and Walmart have been over the years it does not take a huge leap of faith to imagine the next 20+ years turning out much different for these companies. Indeed, the S&P 500 Dividend Aristocrats list looks much different today than it did after the financial crisis in 2008.

Hey, as a former dividend investor I can empathize with the idea that investing in strong dividend paying stocks “feels better” than investing in a broad stock market filled with good and not-so-good companies. But screening for companies based on their historical performance, including dividend history, is not the best way to build a portfolio. There’s simply no guarantee that this reliability and performance will continue in the future.

Businesses change, industries get disrupted, management becomes complacent. All the better to diversify that risk away by investing globally in thousands of stocks.

This Week’s Recap:

On Thursday I wrote about RRSP loans and explained the reasons why you should (and shouldn’t) get one.

Over on Rewards Cards Canada I shared a new enhancement to the prestigious American Express Platinum Card (including a shiny new metal card design)

Promo of the Week:

The Credit Card Genius website released its best credit card offers for 2019 and there are some good ones on the list for those who are in the market for a new card, or looking to claim some bonus points.

The top promotion on the list is for the Scotiabank Gold American Express card, which comes with a 15,000 point welcome bonus plus a $100 e-gift card to Amazon upon approval.

Another offer I’m strongly considering is TD’s Aeroplan Visa Infinite Card. You can get a 30,000 point welcome bonus and the annual fee is waived in the first year. Sign me up!

Weekend Reading:

Lots of reading this weekend so grab an extra coffee and let’s go!

BMO is getting in on the one-ticket ETF revolution with their new offerings of ZCON, ZBAL, and ZGRO. Great for investors!

A crazy story about the founder of a cryptocurrency exchange and his sudden death, causing the search for more than $260 million in digital assets.

An amazing post by investor advocate Neil Gross calling on big tech firms to optimize our finances. Some excellent ideas in here:

“Sci-fi fantasy? Maybe not. Algorithms already drive cars down busy city streets and land space probes on comets, so something this intricate isn’t beyond the tech world’s existing capability. They could build it.”

Tax expert Tim Cestnick tells us to take heed of the 80-percent rule this RRSP season.

Canadian Couch Potato blogger Dan Bortolotti explains what to look for when choosing a financial advisor.

Charlie Munger says teaching young people to actively trade stocks is like starting them on heroin.

Barry Ritholtz shares some excellent examples of paying for advice:

“But then I remember that a true financial advisor doesn’t really earn their fees until the big moment. That moment where a client wants to double their exposure to technology stocks after a 500% rally they feel they didn’t get enough out of.”

Independent Financial Adviser, Darryl Brown, answers some reader questions with Rob Carrick on one of the newest retirement planning strategies called F.I.R.E., Financial Independence Retire Early:

Ellen Roseman says Millennials and Gen-Xers should reach out to robo-advisors to manage their investments.

Kevin Press from Today’s Economy blog interviews Tom Drake, founder of Maple Money – one of the longest running personal finance blogs in Canada.

The Globe & Mail’s Gail Johnson explains how finances play into Canadians’ happiness.

Here’s a very interesting take on the psychological trappings of freelancing:

“Once I started freelancing, things changed. I became hyperconscious of how much money I could (or should) charge for my time, and this made me unhappy and mean when my nonworking hours didn’t measure up to the same value.”

Why technology is poised to (finally) disrupt the mortgage lending industry, with the majority of applications completed online or with a chatbot.

What to do when banks give questionable financial advice to seniors? Jason Heath explains in his latest MoneySense column.

Michael James muses about the emotional money choices he made over the years. These won’t be what you think they are (unless you know Michael).

Mark Seed explains why he doesn’t post net worth updates on his My Own Advisor blog, choosing instead to focus on dividend income updates.

Finally, an interesting and important debate is taking place now about your future car’s moral compass.

Have a great weekend, everyone!

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10 Comments

  1. Dale Roberts on February 17, 2019 at 7:38 am

    Great list of reading and watch this week. Thanks so much to the link of my BMO review. Nice to see a big bank jump in. That takes courage as the One Ticket will attract funds away from other more profitable BMO ventures such as Robo SmartFolio and AdviceDirect and trading at the discount brokerage. They are there to do the right thing IMHO.

    I also put my 5 plus years as a Robo Advisor (human type) to work to with a How To Know What One Ticket To Select post on my site.

    That personal KYC (Know Your Client) Know Thyself Portfolio Selection process.

    Thanks again, Dale

  2. Dan on February 17, 2019 at 7:42 am

    Hi Rob take away my dividend securities
    How do I fund my retirement
    I looked mutuals and ETF’s
    Nothing comes close to supporting my monthly income

    • Garth on February 17, 2019 at 1:41 pm

      Hi Dan. Simply make your own dividends whenever you wish by selling a few shares. It is economically the same as receiving a cash dividend. You will pay less tax and are in total control.

    • Paul on February 17, 2019 at 9:06 pm

      The author’s dismissal of Dividend Growth Investing is very foolish. I guess it is easier to say, “Go get an ETF” than it is to actually put some thought into what you are writing.

      • Robb Engen on February 18, 2019 at 8:25 am

        Hi Paul, for many investors it’s easier to ignore the overwhelming body of evidence that says capturing market returns with low cost, globally diversified ETFs will lead to the highest returns and best outcomes over the long term.

    • Robb Engen on February 18, 2019 at 8:28 am

      Hi Dan, as Garth says it’s quite simple to do this by selling off shares. It requires a mindset shift, though, to get over the idea that you shouldn’t touch your capital.

      I’ve linked to this many times because it’s the best explanation of how to generate retirement income using a three bucket approach (cash, GICs/Bonds, ETF equities): https://www.moneysense.ca/save/retirement/a-better-way-to-generate-retirement-income/

      • Luke on February 18, 2019 at 4:21 pm

        So in Q4 2008, when my portfolio was down 40%, I should have sold almost twice more shares for the same “dividend”? Instead of keeping receiving my dividends and not selling anything?

        • Robb Engen on February 18, 2019 at 4:44 pm

          Hi Luke, the idea behind the bucket approach is to keep one bucket filled with enough cash to last 1-2 years, one bucket with fixed income to eventually replace the cash bucket, and one bucket with stocks for the long term.

          In the event of a market meltdown you’d simply use your cash and/or fixed income to give your stocks a chance to recover.

          What would you do if a good chunk of your dividends were reduced or eliminated in a market downturn?

          I’m not anti-dividend, it just seems like that approach is more geared towards investors who want to leave a large estate. Why else would you not want to touch your capital?

          • Luke on February 18, 2019 at 6:42 pm

            And if we get a Nikkei event, where the stock market remains at -50% for 30+ years? How does your bucket strategy copes?

            The idea is to distribute dividends among several companies, so that one loses only a marginal number of paychecks.



          • Arnold Toews on February 19, 2019 at 6:04 pm

            I am retired and my income is mostly dividends. I could never understand that you would need to keep 1 – 2 years of cash. Have you ever calculated how much you loose in dividends over say 20 years of retirement? if it’s 100K that’s 60K in dividends. In 2008 when my portfolio dropped over 30%, my dividends only dropped 14% and then started rising again where today the are more than 100% higher. And you can still sell shares in good years, but hold on in the bad years so you don’t miss out when they go back up. My total portfolio doubled between 2008 and 2012. Go dividends.



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