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Will the Company Still Pay Its Dividend? A Quick Guide to Avoid Dividend Cuts

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Exactly a year ago, I started investing the sum of $100,000 in the stock market. It took me about three months to complete my portfolio. Today, 100% of this portfolio is invested in dividend paying stocks. I can’t predict what is going to happen on the stock market, but I decided to invest my money anyway. I did it following a complete investing plan, including a methodology to avoid dividend cuts.

Any dividend investor’s worst nightmare is a dividend cut. After all, we invest to receive these precious distributions and we base our retirement plan on them. The last thing we want to see is a company slashing their dividend and leaving us on the side of the road. If you are like me, you love dividend stocks. However, you may fear that some of your stocks don’t hold their end of the deal.  Let me explain how I built my portfolio avoiding all companies with potential dividend cuts.

Dividend Cuts: A Good Defense is a Strong Offense

When it comes to investing, the best way to avoid picking rotten apples  who cut their payouts, is aiming for those who intend to grow it. Your best protection against dividend cuts is dividend growth. When you look at the market with a set of dividend glasses, here’s what you see:

Dividend Growers

Dividend Payers

Dividend Cutters

Non-paying dividend stocks

I don’t know about you, but it seems a lot better to be part of the first group than others. You don’t have to believe me. You can believe financial analysts conducting pages of research coming to the same conclusion: dividend growers are the best breed of stocks.

Source: Earning dividend income just makes sense, AGF Investments

Think about it: what was a company doing with its dividend before a dividend cut?

The answer is clearly not increasing it. As I’ve mentioned in a previous post, the first type of dividend cut is one in disguise. Before cutting its dividend, the company will maintain it for several years. When a company starts paying a dividend, it carries a burden forever. Investors will expect the company to keep distributing a part of its profits. If the company is struggling to grow, it will maintain its dividend and try to find solutions. After a few years, the company could hit another bump in the road and management will be forced to cut its payment.

Tip #1; an absence of dividend growth is a red flag for a dividend cut.

When you look for dividend grower, you are not completely shielded against potential dividend slashes, but you wear a good armour against it. You can start looking for dividend growers with the dividend achievers list.

Find business growth vectors; you’ll find how it will protect your dividend

Another way to avoid picking potential dividend killers is to pick companies showing several ways to grow their business. During any market crashes, most companies will see their stock price fall. However, those which will maintain and increase their dividend during those periods are the ones with the most solid business model.

There are plenty of companies that recuperated very fast from the 2008 crisis. Companies like Disney (DIS), Starbucks (SBUX), Johnson & Johnson (JNJ), Royal Bank (RY.TO), National Bank (NA.TO) and Canadian National Railways (CNR.TO) have all recuperated in less than 12 months. Not bad for one of the worst stock market crash, huh?

Source: Ycharts

Tip #2; if you can’t find growth vectors, chances are the company won’t increase its dividend.

Here’s a short list of bullet proof metrics to follow prior to selecting your stocks.

High yield stocks must be selected with moderation

We all like stable companies like Real Estate Income Trust (REIT) that pays a juicy yield and show solid balance sheet. But what will happen with those REITs when the economy shift? You guessed it; dividend cuts!

One of the best examples just happened recently. Would you invest in a REIT that is specialized in renting offices to the #1 renter in the world; the U.S. Government? Imagine if this REIT would pay you close to 10% yield. Don’t you think I just defined the most amazing investment for any income seeker? This sounds like the deal of the century, right? I guess it was, until Government Properties Income Trust (GOV) announced a merger with Select Income REIT (SIR). In the process, oh surprise, shareholders will see their dividend being slashed. Here’s what GOV looks like this year:

Source: Ycharts

And what did the dividend looked liked before the cut? You are right! It was flat for several years…

Source: Ycharts

Final Tip: When a company is offering a high yield; be careful

If you are looking for high yield stocks, I suggest you read this article and select among our retirement stock list.

Want to make sure your companies will continue paying their dividend?

On Thursday, October 11th, I’ll host a free webinar. I will discuss dividend safety in your portfolio.

I will address major concerns we all have regarding our holdings: how do we make sure our stocks continue paying their dividend? Even better, how can we make sure companies we hold will increase their dividend going forward? I will dig into how earnings and payout ratios are calculated, and I’ll also have a special section about REITs too!

Register to the webinar here (free)

Topic: Make Sure Companies Pay Their Dividend and Don’t Cut It

Date: Thursday, October 11th at 1pm EDT

  • You must register with Webinar Ninja to attend (if you did it in the past, no new registration is required). This is completely free and the webinar is free also. Webinar Ninja is the platform we use to run all our webinars. It works well and provide an optimal experience for everybody.
  • The presentation is about 30 minutes.
  • There will be a Q&A session of about 25-30 minutes.
  • The webinar works on Google Chrome or Safari from a laptop or computer. (not compatible with smartphones or tablets)

If you can’t make it on time, there will be a full replay available, but you must register to access it.

Register Here

Our webinar presentations are about 30 minutes long and the rest of the hour is dedicated to your questions. We can discuss stocks, strategies or any economic events. I’ll be happy to help you anyway I can, so prepare your questions.

Can a Robo-Advisor Help You Save for the Future?

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This is a guest post from Tom Drake at MapleMoney.

In recent years, robo-advisors have taken the financial world by storm. Can an algorithm really manage your money as effectively as any other financial professional?

While the jury might still be out on that subject, the reality is that many people benefit from robo-advisors. I’ve been hesitant to turn to robo-advisors because it’s seemed like I do fine on my own. I’m investing in Canadian dividend stocks as part of the Smith Manoeuvre. Everything else I’ve got is in ETFs and index funds.

But, of course, ETF investors are exactly what robo-advisors are aimed at helping. Besides, using a robo-advisor can be less expensive than investing in “traditional” mutual funds. If you’re trying to decide what to do with your money, here’s what you need to know about robo-advisors:

How Do Robo-Advisors Work?

First, you need to understand how robo-advisors work. These companies follow the principles of modern portfolio theory (MPT) to create an asset allocation for you. When you sign up, you will be asked to fill out a questionnaire. This questionnaire looks at your current situation, as well as when you hope to retire. The advisor uses the information to put together an asset allocation that is likely to work for you.

Many robo-advisors (and there are many) meet your asset allocation requirements with the help of exchange-traded funds (ETFs). These are collections of investments that look a lot like mutual funds. However, they trade like stocks on the exchanges, so they can be a little easier (and less expensive) to buy and sell. A robo-advisor will build your portfolio with a mix of stock and bond ETFs that add diversity and are likely to help you reach your goals in the long run. Using the principles of MPT, the robo-advisor will assign you a set percentage of stocks vs. bonds, and then adjust the ratio as you get closer to your goal.

With many robo-advisors, all you need to do is invest a set amount of money each month, and it will be invested according to your asset allocation. If one asset class becomes too strong in your portfolio, the robo-advisor will automatically sell it, and then use the gains to buy more shares of an asset class that you could use more of in your portfolio. It all happens without you needing to do more than keep investing.

Another nice touch to robo-advisors is that you can actually access dividend growth. You can’t invest in individual stocks, but there are dividend funds. Wealthsimple’s Growth portfolio offers a respectable 2.32% dividend yield, with a cost of 0.1% annually. That’s not bad at all, and it offers you a way to add a little more growth to your portfolio without the need to manage your own dividend stocks.

Simplicity and Low Cost

While a human investment advisor can tailor your portfolio more specifically to your needs, the reality is that you might not have the assets to qualify to work with a wealth manager. This is especially true for beginning investors. You probably want some guidance, but you don’t have the assets to get personalized help from a dedicated investment advisor. This is where robo-advisors can help.

Your portfolio is going to be very similar to others’ in a similar place, but it will have small tweaks based on some of your risk tolerances differences. The reason this works is due to the broad-based ETFs. Because the ETFs used have exposure to a wide swath of the market, you have the chance to keep pace with market performance. No, you won’t beat the market. But if you are looking for a way to steadily build your nest egg over time, you don’t need to beat the market. Instead, keeping pace is usually sufficient over time.

It’s a simple way to grow your portfolio without the need for complicated formulas or the need to try to evaluate stocks on an individual basis in an effort to pick a “winner.” Plus, your risk is a little lower than with stock picking because you have a whole basket of investments. If something loses ground, you have plenty of other items to make up for it.

On top of all that, robo-advisors come with low costs. Investing in three to five well-chosen mutual funds can accomplish much the same thing as a portfolio put together by a robo-advisor. However, it will cost you much, much more. It’s common to find mutual funds in Canada with annual management fees of between 1% and 2.5%. Many ETFs, on the other hand, have much lower fees — more on the order of 0.1% annually. Once you figure in compounding, you could end up with hundreds of thousands of dollars more in your nest egg after a period of 30 years, just by choosing investments with lower fees.

Many of those who manage dividend portfolios find that robo-advising wouldn’t be that great for them. remember though, that dividends are part of a robo-advisor’s portfolio, and that can benefit you in the long run. You get access to a solid collection of dividend-paying investments at a low cost and without the need to try to identify the best choices.

Robo-Advisors Aren’t for Everyone

Robo-advisors are great for those who are just starting to invest and might have fewer assets. They offer a way to invest a bit each month and build a portfolio using time-tested strategies of asset allocation. Additionally, a robo-advisor can be great for a more seasoned investor who wants a relatively stable core for a long-term portfolio.

Robo-advisors help beginners with analysis paralysis get over their hangups and start investing in low-cost ETFs that can help them take that first step. Once you are investing using a robo-advisor, you can start learning more about investing and your options, and perhaps branch out into different assets in different accounts.

Tom Drake is the founder of MapleMoney, a personal finance blog that helps Canadians learn how to make money, save money, invest money, and spend money in a way that helps you create lasting financial freedom.

The Dividend Cut in Disguise

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Things are not always what they seem

-The Internet

Today I want to discuss every dividend investors’ worst nightmare: a dividend cut. In most cases, dividend cuts are catastrophic. When you think about it, a company would likely save its shareholders from the pain of seeing their income being slashed. When management comes to the point where it grabs back the money it was supposed to give you; this is because it has not other options left. A dividend cut is a confession of mismanagement. A confession the company failed their shareholders. But did you know that not all dividend cuts are obvious? Some are done in plain sight, some dividend cuts are done in disguise…

source: Ycharts

Dividend cuts are obvious

When management announces a reduction of their dividend, the news spread faster than a contest to win two tickets for the NFL Super Bowl. Media will use powerful words such as “axed”, “slashed” or even “killed” (this reminds me of my time in El Salvador and Honduras!?!). It is then quite easy for investors to know what is going on and take action. According to my investing rules, a dividend cut is a stock to sell…now.

Dividend cuts in disguise

While the financial press does an amazing job at reporting dividend decreases, it does an awful job at tracking down hundreds of companies fooling income seeking investors. Those companies cut their dividend in your face and nobody is saying anything. Even worse, most investors are happy about the situation! The problem is all in perceptions I guess. While everybody sees this:

Source: Ycharts

I actually see this:

Source: Ycharts

You got it right! While many income seeking investors are super happy to hold generous shares of Compass Diversified Holdings (CODI), they all forget that the 8%-9% the company is paying doesn’t move. This is definitely not a problem at first, but 10, 15, 20 years from now… things get ugly because my good friend “Mr. Inflation” invites himself to the party.

Source: Ycharts

By keeping the same dividend for years, your payout is getting eaten alive by inflation. Each year, it’s like you would be suffering from a 2% dividend cut. You don’t see it, you don’t feel it, but 10 years from now, it’s going to hurt.

The “non-increase” is the first step to the dividend cut

As the inflation rate hasn’t been too bad over the past 10 years, most income seeking investors don’t really mind it. Many tell me, “Mike, I’m retired and I need this 8% income, I don’t care about inflation”. Okay. I get it. Imagine you have $1M invested at 8% and you only need $60k/year to live. This means inflation can eat up $20,000 before it affects your lifestyle. Make sense. Sort of.

The problem is that many companies that keep their dividend as is will eventually cut it. You know why? Because if management can’t increase its payout, it is most likely because the business isn’t doing that well. I tried to find companies where they were showing growing revenues and earnings but with no dividend increase over the past 5 years. They are pretty rare. In fact, most “non-increasing” dividend paying stock will eventually look like this:

Source: Ycharts

As you see, with poor shareholders of New Senior Investment Group (SNR); they lost both their source of income (-43.5%) and their investment (-63.6%).

Final thought

I’ve obviously cherry-picked my examples with CODI and SNR here. I always find it easier to show real-life example (a bit extreme) to show classic investing principles. In the end, when a company stops increasing its payout, you should start wondering why it happens. Not all companies will end up with the above-mentioned scenarios. But thinking no dividend raise for the past 4-5 years is a good sign would be the definition of “investing naiveté”.

What Any Millennials Should Read About Investing

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Ah! Not enough articles about how you should save and invest money when you are in your 20’s? I decided to write this article because some of my younger readers asked me to. But I bet you don’t want to read another article full of basic investing advice for young professionals, right?  So, here’s the deal, I’ll start with a bunch of “classic advices” just in case this is the very first article you read about investing. Then, I’ll go with investing tips I used as a young investor.

The Basic Stuff

I already wrote some very good articles about various basic investing topics. Therefore, instead of repeating myself, I’ll just leave you with some bits of knowledge I previously wrote. Click on each title to learn more about this specific advice.

Let’s start with 100 investing lessons in 5 minutes (oh yeah!);

Now my best and worst moves as a young investor;

Wanna start investing? Here’s how you can start investing with $100/month;

Here’s how you can grow your income very fast to save more than $100/month (I did all those tricks);

Time in the market is everything… really everything!

Want to reach $1M? here’s how you do it;

Want to get rich faster? Here are some investing accelerators;

ETFs or Dividend? I always pick the latter!

Currency (CAD or USD) doesn’t matter at all.

Finally, Ignore bitcoins;

I said: Ignore Bitcoins!

You want more? Here are a few real tricks you should definitely consider if you are a young professional and looking to save some money.

01 Consider Leveraging

Let’s start with a super controversial topic; borrowing to invest. Before you get your box of tomatoes ready to be thrown, consider this:

  • You borrow money to buy a car (or worst, you lease it).
  • You borrow money to buy a house (and then spend years paying it back, thousands to assure a proper maintenance and lots of energy cleaning it!)
  • You borrow money to go to school (and it usually pays off!)

Those are just common examples of financial decisions you make when you think borrowing money is a good thing. Let’s add another one; borrow money to invest.

The whole point is not to enter in an investment loan of 100K tomorrow morning. That’d be stupid. However, if you borrow a few thousand to invest money, two things will happen:

#1 You will be forced to save (as you will be forced to pay back this loan).

#2 You will start investing today (instead of waiting for “having enough money to invest”).

The whole point is to get you started right away and force you to save in a “reverse” manner. Instead of putting money in a savings account, you use a monthly payment to pay off your original loan while your money is already invested. This also allows you to use leverage the right way; never borrow more than you can pay off with your budget.

My story

Between the age of 23 and 26, I used leverage twice. At 23, I had my first job in a bank and I had virtually no debt and very little monthly expenses. I decided to borrow 25K over 5 years to buy a piece of land. Then, I borrowed 20K on a line of credit ($19,500 to be exact) and invested this sum in the stock market.

At the age of 26, I sold my two assets. The profit made on the land was about 40% over 24 months (since I used borrowed money, my capital required was minimal). I made even more with my investment as I used my portfolio as a cash down for my first house. After I paid off the line of credit, I had about 50K left in profit.

02 Start a side-gig

You are young, you are smart, and you are full of energy. Most importantly, you have more time than you can imagine. Therefore, cut down your binge time and social networking and get yourself a side-gig. In an ideal world, you would start your own side project where you can make money when you have free time. But you can also work part-time at a second job and use this extra money to invest.

My Story

While I was at university, I used to work about 30 hours a week. I was delivering bread in grocery stores. When I got my first real job, I kept the bread delivery on Saturdays. I was working 6 days a week, but that extra money was used for my borrowing strategy. Plus, if I were ever to lose my “real job”, I would always have something to fall back on.

Then, in 2008 (at the age of 27), I actively started making money with websites. This was another side gig I started with my best friend. 10 years later, this side-gig is now my business and it generates enough money to support a family of 5, and we already have one full-time employee!

03 Invest right away and make mistakes

You can probably read thousands of books and blogs and spend 5 hours a day on investing websites; you will never learn what really matters: losing real money hurts. You can imagine the pain, but you can’t feel it. This is why you must start as soon as possible to invest, and eventually you will make your first mistake. Once you lose hard earned money, you will be eager to read financial advice differently and actually apply it in the future!

My Story

It took me 4-5 years to make my first investing mistakes. Since I started at a good time (2003-2008 was a great bull market), pretty much all investments were making money. This was until I decided to invest $10K in a single penny stock. I was the king of the world…until the mining company I invested in plummeted as it didn’t find any gold. I lost $5K from my original investment in a single day. This happened more than 10 years ago, and I’m still able to feel the void inside myself when I came back from lunch, refreshed my online portfolio and saw the 50% drop.

After this adventure, I decided to sit down, read carefully and build a solid investing process.

04 Maximize your financial structure right away

When we are young, we think that we have all the time in the world to setup our financial structure. Since this step is especially boring, nobody wants to hear about tax saving tips and estate planning. We all want our money to go out, travel, buy cool stuff. Investing in a will or participating in our employer’s shares benefits account sounds like a waste of time. But if you get your structure straight, you will be saving hundreds (and thousands) of dollars yearly. Without having to do anything!

This is the key. If I give you $1,000 per week and tell you to put $200 aside, it will get tricky if you have a bad month. You will constantly be tempted to use the full $1,000 since it goes into your account. Imagine that I give you $800 per month instead and the $200 is automatically put aside without going through your bank account. You will just get used to spending/managing $800 per week, and you will forget about the extra $200 you could have spent.

My Story

When I started at the bank, my boss almost forced me to use 8% of my salary to buy shares of my employers. The deal was simple; I put in 8% of my salary, my employer adds another 4%. Then, he also instructed me to never touch my bonus and always put it in a RRSP (a retirement account). As my employer was already offering a defined benefit pension plan, I was saving more than 20% of my income without realizing it.

By getting my financial structure right at first; I also subscribed to a life insurance policy and had my will done early. My life insurance is a real deal as I pay pennies compared to how much I would pay if I had to subscribe to the same insurance today. As for my will, my wife and kids would be quite relieved if anything would happen to me.

05 Final advice: Invest in what you know

This will be difficult since all millennials know everything… hahaha! Just kidding! This final piece of advice isn’t coming from me but rather the father of patient investing; Warren Buffett. The whole point of investing in what you know is to be able to write down a strong investment thesis. Numbers and financial analysts can tell you many stories, but if you don’t get it, if you can’t tell your own story about this company, you will never make money on the market.

I let go of many great and not so great investing possibilities throughout the years. Any time I wasn’t able to fully understand how the money was made or how the business was growing, I just dropped the ball. Keep in mind there are thousands of different companies you can invest in. Why bother with the ones you don’t get when there are hundreds that you will fully understand? Keep your investment simple; you’ll make more money!

When is the Right Time to Take Profit?

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This September is quite a special month and it is not because it will be my birthday soon. Nope, in September we are celebrating a great anniversary: it’s the 10th anniversary of the last market crash. For young investors like me (I’m turning 37), this was the only market crash where we lost a few thousand (or more).

I was part of the lucky investors who didn’t have much money invested in the stock market back in 2008. I wasn’t smarter than anyone else, I just withdrew most of my money to buy a house in 2007. Therefore, my portfolio was down to about $30-40K back then. I didn’t really mind losing 27% of my nest egg at that time! As we ride what seems to be an eternal bull market (don’t take that for granted!), one of my readers asked me a very interesting question.

When is the right time to take profit?

What I liked about his question is that it wasn’t the classic “when it’s the right time to sell?” question. He meant it as “you have holdings in your portfolio showing triple digit returns, when do you sell a part of it?”

I have a few big winners in my portfolio (Apple, Lockheed Martin, Johnson & Johnson and soon Amazon). Would I ever sell them partially or as a whole? This is the question he was asking.

Let your winners ride… forever?

In an ideal world, I would only have big winners in my portfolio and they would all grow about the same pace. But we all know this is some kind of fantasy we all dream of as investors. The truth is, most of our selections will do good, a few of them will fail us and a handful will end-up in “the best investment of your life”.

I’m all about letting my winners run. I have no rules to sell them partially or completely once they reach 100% or 200% of their original value. My only selling rule is the company must fit with my investment thesis at all time. Therefore, as long as a company shows the reasons why I bought their shares in the first place, I keep them.

Where is the problem?

Unfortunately, you can’t really let your big winners forever. Why not? Imagine your portfolio was composed of 20 stocks with an equal weight at the start. Now imagine that one of those 20 companies was Apple (AAPL) and that you started your portfolio 10 years ago. If you didn’t sell any shares of AAPL over the past 10 years, here’s what you get:

Source: Ycharts

You are probably rich by now and feel very smart. The problem is your portfolio probably look like this:

With 80% of your portfolio in a single stock, you only wish Apple doesn’t become Blackberry…

Source: Ycharts

No matter how great the company is and no matter how strong its business model seems, there is always a way to blow it away within a few years. If you want to avoid this unfortunate situation, the only way to do it is to restrain your holdings. Instead of selling according to their investment return, you can sell shares according to their weight in your portfolio.

How much weight is not too heavy?

Ah! That is a tough question to answer! I know because my position in Apple is currently 11.5% of my total retirement portfolio. The impact of seeing AAPL collapse by 50% would be losing almost 6% of my total portfolio value.

I guess the answer to when a holding is too important in your portfolio is another question:

How do you feel about losing 50% of your largest holding? 

I have a very high-risk tolerance. Therefore, I think I could live with a 10% drop of my portfolio due to one holding. However, chances are that I may start selling a few Apple shares once it reaches a weigh of 15%. I just don’t want to put too much money on a single stock. Plus, if Apple weights 15% of my portfolio, chances are that techs in my portfolio are over 30%. This is definitely not something I want.

Therefore, when you look at your holding, you almost must consider the weight of the whole sector. I t don’t think any one sector should represent more than 25% of your portfolio. Large industries can be divided into sub-sectors as UPS (UPS) will not react the same way 3M (MMM) and Lockheed Martin (LMT) on the market. However, they are all considered as “industrials”.

How much do you sell?

Since I’m talking about your biggest winners, I will not likely sell half of my shares of Apple in a heartbeat. Chances are I would drop my 15% position down to 10% and wait to see what happens. I would use the proceeds to invest in another sector to rebalance my portfolio.

Final thought

I don’t track my portfolio on a daily or weekly basis. I like to see the movements as a trend and wait for each quarter to review each company. I only look at my portfolio asset allocation once a year. I do that to minimize the amount of trades and reduce the emotions around it. There is always a lot of noise over a whole 12-month period, and you don’t want to waste too much energy trying to figure out what will happen with NAFTA, Chinese trade war and Turkey’s financial problems. Chances are it will all settle down in the next 12 months ?.

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