June 1, 2015
It’s hard not to get caught up in the daily news flow that drives the market higher one day, only to take back some or all of those same gains a mere day later. One day a Federal Reserve member might talk about an interest rate hike, causing equities to contract, and the next day a weak economic data point might very well reverse those same losses. Notwithstanding the volatility, one of the best ways to make money is not to attempt to take advantage of price swings, but rather to sit back and get paid to wait.
Empirical research demonstrates the importance of dividends. Between 1972 and 2010, when the S&P 500 index generated a total return of 7.3%, dividend growers grew by 9.6%. Over the same time period, dividend payers that did not change their payouts earned 7.4%, about the same as the index. Meanwhile, non-dividend payers and dividend cutters appreciated by -0.5% and 1.7%. Just think about what a good stock-picker you would have to be to make money consistently on non-dividend payers!
This week, Canadian banks reported their earnings. While all beat analyst estimates and several (National, CIBC, and BMO) raised their dividends, most commentary suggested that core earnings were muted with investment banking driving much of the growth. Nevertheless, Canadian investors that have bought shares in these perpetual dividend-growers have benefited from a healthy return over the long run.
Consider as an example TD Bank, a financial institution that has raised its dividend in every year but four over the past forty years. If an investor were to have bought $10,000 (akin to $44,752 in today’s dollars) in TD Bank stock some forty years ago, the shares would be worth $602,000 today. Along the way, 480 months after the investor’s original purchase, the investor would have collected $220,000 in dividends (almost 40% of the total return). If the investor reinvested those dividends as they were received over the years , the total investment would be worth $2.7 million today. The same is true, to a greater or lesser extent, of not only other Canadian banks, but a variety of high quality companies that raise dividends regularly and often.
Of course, market timers miss these types of gains. They are often waiting for the next 100 point swing in either direction on the index. They miss the dividend payments and (assuming their trades are profitable) deplete their capital when they are required to pay capital gains tax on profits realized that same year.
At Baskin Wealth Management, we look for companies that not only pay dividends, but have a solid history of increasing that dividend payout per share over time. History has suggested that this is the best way to outperform the market, and we continue to look for opportunities.
*Clients of Baskin Wealth Management are shareholders of National Bank and Toronto-Dominion Bank.
