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 2018, I hosted a free webinar. I will discuss dividend safety in your portfolio. You can watch the full replay by clicking the link below.
Register to the webinar replay here (free)
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.
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.
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