Not so long ago, I released my Best 2014 Dividend Stocks Book including what I think will be the most profitable investments on both American (20 picks) and Canadian (10 picks) markets. Last year, I beat both markets and intend to reproduce my performance again this year.

But picking stocks at the beginning of the year and making a monthly follow-up is only a part of showing you what we call “accountability”. The real meaning of this word usually happens when you put your money where your mouth is. And this is what I did last week when I added a new stock to my portfolio: Gluskin Sheff (GS) which is traded on the TSE.  You may not be familiar with this Canadian wealth management company and this is why it makes the choice even more interesting. I hope you will discover this great company today!

Gluskin Sheff (GS) Business Description:

Gluskin Sheff + Associates is one of the first Canadian private wealth management companies founded. GS manages investment portfolios for high net worth clients as well as institutional investors, foundations and municipalities. They claim to be “Stubbornly unconventional”. Founded in 1984 by Ira Gluskin and Gerald Sheff and 24 other private clients, the company is still owned at 26% by senior management and employees.

I can appreciate the fact that 26% of shareholders have an even bigger interest in the well being of a company than the average investor. For these people, GS is their whole financial life.

GS Stock Graph

As you can see, GS has already showed some great upside in 2013 going up by 96% in the past 12 months. But let’s dig further to see what is so interesting about this company…

GS Dividend Growth Graph

If I didn’t get your attention with a 1 year return of 96%, I’m sure I just did with this hectic dividend graph. This looks more like a cardiogram than a dividend payout graph, right? This is explained with the interesting habit of Gluskin Sheff to distribute special dividends in September. These spikes in dividend payments are explained by the distribution of extra cash coming from the company’s performance. I’ve taken away the special dividend to come up with another graph:

As you can see, for the past 5 years, the company has continuously increased its dividend payment to shareholders. Now, we will see what the total dividend paid yearly looks like:

Quick note: don’t always count on the special dividend payment. While it was quite substantial for four out of five years, GS definitely missed their revenue target in 2012 and only paid a small $0.06 as special dividend. This is quite a difference when you look at 2011 ($0.9375) and 2013 ($1.40!). The special dividend is directly related to the total assets under management along with performance fees. Since 2012 wasn’t a great year for GS, the extra dividend sucked.

The Company Ratios and Financial Info:

Gluskin Sheff Upcoming opportunities and dangers:

They recently declared a special dividend in September of $1.40 per share. This represents about 5% dividend yield with this payment only. The company evolves in a highly profitable market and the company has become appealing to other big players for a takeover. I also like the fact that private clients tend to be more loyal than average. The 2013 numbers were very interesting and if the company continues to post such results, you can bet on another great year on the market.

The main GS downside would be to count on an important special dividend in September. This payment is volatile and depends on how efficient the GS team is on the market. If we have a good year in 2014, the Gluskin Sheff dividend payout will continue to be juicy. This is one company that could pay 6% in your portfolio without jeopardizing its overall return.

Final Thoughts on Gluskin Sheff

I already like financials as they represent a very interesting sector considering the current economy. In addition to that, GS is evolving in the wealth management industry, which I believe is the future of financial services. GS seems to be operating in the right industry at the right time and its numbers are there to support the overall enthusiasm.

As a bonus on holding this company, there have been rumours about a potential sale of the company in 2013. While it seems that it is not the intention of management at the moment, it could represent another great upside if a hostile bid would come to the table. Since we know wealth management is a small world, it could be a great opportunity for a bigger player to buy this well managed company.

This is why I decided to put my money where my mouth is and add Gluskin Sheff to my portfolio.

Disclaimer: I own shares of GS

Hey!

How’s investing in this beginning of the year? I’ve personally made two new additions to my portfolio this week. I’ll talk more about it next week. One of my pick is already making 7% in one week only! Not bad, huh?

Here are some great dividend reads for the weekend.

There were a few articles about high dividend yield stocks this week:

My own list of Best High Yield Dividend Stocks

A List of High Dividend Yield Growth Stocks at Hello Suckers

And 12 more from the High Yield Aristocrats Index (not all of them are high yield per se) at Dividend Yield

There were also some great overviews of 2013 portfolios:

My US portfolio made 37% in 2013

Dan Mac made 33.8%

Dividend Blogger made 28.8%

My Own Advisor made $7,645 in dividend payouts

Dividend Stock Analysis:

JM Smucker (SJM) @ Dividend Monk

General Electric (GE) @ Dividend Growth Investor

McDonald’s (MCD) @ Dividend Ninja

Textainer Group Holdings (TGH) @ Dividend Engineering

Chevron (CVX) @ Captain Dividend

On Monday, I published an important compilation of strong dividend stocks per sectors. In total, I listed 390 dividend stocks in 11 charts for both American and Canadian markets. When I first started to work on this article, I thought of listing all dividend stocks and simply classify them per sector. Then, I realized there were WAY too many stocks and it was pointless to bombard you with 1,000 stocks (even 390 is a big number!). In order to make a good list, I used the following metrics:

#1 Dividend yield between 2.50% and 7% – I wanted to make sure we have interesting dividend stocks

#2 Payout ratio under 80% – I wanted to make sure the companies can continue to pay their dividends

#3 Positive Dividend Growth for the past 3 AND 5 years  – Here again, a good sign the company is in sound financial shape

The main goal was to highlight solid dividend stocks and give you a few ideas at the beginning of this year. I received a few comments saying that my dividend lists don’t include high yield dividend stocks. Another reader even mentioned that he would like to see more lists of 10%+ dividend yield stocks instead of the list I provided showing stocks paying as low as 2.50%. After all, I even picked Disney (DIS) in my portfolio in 2013 when it paid about 1% dividend yield. You can guess I’m not too favorable regarding high yield dividend stocks. But since I’m a good guy, I decided to write a paper about the high yield dividend stocks and I’m giving away my favorite picks for high yield dividend payers at the bottom of this post.

HIGH YIELD DIVIDEND STOCKS DON’T SHOW THEIR REAL FACE RIGHT NOW

Some investors may disagree with me, but I don’t think it’s fair to consider how high yields are doing during a bull market. In fact, during a bull market, everybody is happy and stocks keep climbing. But what makes a for a bull or bear market?

It’s a combination of many things. Technically, we need companies showing strong sales and profits while economic indicators such as unemployment rate, consumer confidence, manufacturing index, etc will confirm that sales will continue to grow and profits will follow.

Following this premise, when you are in a bull market, there is a general aura of good news for all companies. This is why don’t see the real face of many stocks during this period since we are looking at them through rose-colored glasses.

This is what is happening with high yield dividend stocks. When you look at a stock paying over 5% in dividend yield in this current market when you can’t even make 3% on a 5yr GIC, there must be a red flag popping up to tell you there is a risk premium. The problem is you won’t feel the risk premium during a bull market as all stocks go up or are artificially maintained by this aura of good news.

Therefore, for several years, sales can be flat, dividend growth non-existent and dividend payout ratio very high (read over 100%) and nothing will pop on your screen. In fact, you will be very happy to receive a 10% distribution for a few years and you may even start thinking this is the way to go. The first red flag should be how the stock reacts to the current market. Last year is a great example to see if you are holding a high dividend yield stock that will plunge once the market slows down. Why? Because, it was probably the best year of the decade in terms of returns. The US market hit +30% in 2013. If your stock paying 8-9% dividend yield and barely finish the year in black, there is a problem. When the market is up by that much, you should expect all your stocks to go up. If some of them don’t, it’s because there is very bad news associated with them.

In 2013, would you prefer a stock that is up by 30% and pays a 3% dividend yield or a stock that is up 3% and pay a 10% yield? I would take the first stock in a heartbeat. But not because of the total return. That’s important but there is more to it. How do you think the second stock will react during a 15%-20% correction? There won’t be the good news aura anymore and this stock may flunk big time. On the other hand, the stock that was up during the bull market probably shows strong fundamentals that will help it weather a recession. The high dividend yield stock will probably show its true face including financial complications, dividend cuts and a big stock drop. In other words, the risk of buying high dividend yield is way higher than you think.

DOES IT MEAN ALL HIGH DIVIDEND YIELD STOCKS SHOULD BE BANNED FROM MY PORTFOLIO?

No, there are good stocks paying a high dividend yield. But in most cases, these high dividend yields are temporary. The best example I could think of was Seagate Technology (STX) a couple years ago. It was paying in the range of 6% dividend yield due to an important stock value drop. However, the company was able to get back on track and readjust. Today, the stock is now paying a 2.90% dividend yield and the value is up by 203% over the past two years.

But the classic high dividend yield looks more like RioCan (REI.UN) a Canadian REIT showing a negative return of -4.25% over two years (compared to +12.05% for the Canadian Index) and a dividend yield of 5.56% while the dividend payout hasn’t moved over the past 2 years. All that to say when there is a high yield; there is also something else hidden. However, if you look at companies carefully, it is possible to find strong companies that went through a rough time and show a great buying opportunity.

2014 BEST HIGH YIELD DIVIDEND STOCKS

Even though I’m not a big fan of high dividend payers, I’ve made an effort to dig further and find interesting companies that are worth a further look into their fundamentals. I’m sharing with you only a part of a better list (with additional metrics) that we maintain weekly at our premium dividend site; Dividend Stocks Rock. We have built a list where we look for relatively strong metrics combined with a higher dividend payment. The key was to find a balance between the risk of a high dividend yield stock and the strength of a stronger company with weaker payouts. Let me know what you think of our list!