Investors are in love with dividends — and your clients no doubt reflect this emotion. It is a well-founded affection because, in the absence of meaningful short-term interest rates, the appeal of steady, possibly increasing income from stocks is real and logical.
Just how real is indicated by Investment Executive’s recent survey of 140 companies that paid a dividend every year in the five years from Jan. 1, 2006 and Dec. 31, 2010. For some stocks, accumulated dividend receipts made up for a loss in share price.
In this way, dividends cut risk. They also cut volatility, because many of the names in the list — especially the top performers (see table, right) — are among the most stable stocks in the market.
IE’s survey also calculated total returns for the stocks, defined as the sum of price appreciation (or loss) plus dividends received over the five-year period.
Here is what the survey reveals:
> The stocks (including a few former income trusts) had an average total return of 32% vs a 19% gain by the S&P/TSX composite index.
The dividend-reinvested version of the S&P/TSX composite index, known by the acronym TRIV, gained 37% over the five-year period. But TRIV is not a fair comparison with total return. TRIV compounds dividends by theoretically reinvesting them immediately. The average investor usually can’t do that, mainly because the dividend amounts received are too small to purchase additional whole shares. The exception, of course, is for investments through dividend-reinvestment plans.
> Of the 140 stocks, only 51 dropped in price between yearend 2005 and yearend 2010.
> Dividends paid by 19 of the losing stocks exceeded their capital loss — that is, dividends changed an overall five-year stock price loss into a total return profit. The average total return for those 19 stocks was 9%. Excluding the dividends, their average loss was 10%.
> For another 15 stocks, dividends paid exceeded their price gains. This resulted in some powerful moves, with an average total return of 26%. Half that return came from dividends; half from price appreciation.
Canada’s largest dividend-payers are the chartered banks. Only one — Bank of Montreal — failed to gain in price over the five years. Dividends offset that drop, resulting in a 9% total return for the stock. The smallest of the group, Canadian Western Bank, provided a 70% total return.
Dividends paid by Canadian Imperial Bank of Commerce, National Bank of Canada and Royal Bank of Canada exceeded their five-year price gains. These resulted in total returns ranging from 24% (CIBC) to 33% (National Bank) and 36% (RBC). Thanks to a price gain, Bank of Nova Scotia’s total return was 43%.
Among the diversified financials, another major source of dividends, Fairfax Financial Holdings Ltd., provided a 131% total return. This is by far the largest total return in the sector, thanks to a huge price recovery by the stock. Other insurers’ stocks dropped in price, and only three others provided a positive total return: Great-West Lifeco Inc. (4%), Industrial Alliance Insurance and Financial Services Inc. (41%) and Intact Financial Corp. (11%). Dividends made the difference for GWL and Intact.
Of the 15 energy-sector stocks in the survey, nine provided positive total returns. This sector includes pipelines and, in that industry, TransCanada Corp.’s dividends exceed its price gain for a 23% total return. However, Enbridge Inc.’s price gain lifted that stock to a 74% total return.
Among oil and gas producers, Canadian Oil Sands provided a 41% total return, thanks to its dividend payments (or distributions, when it was an income trust).
Canada’s short list of utilities provided positive total returns all around, but price gains exceeded dividend payments for most. Two utility stocks in the survey, Caribbean Utilities Co. and TransAlta Corp., dropped in price over five years, but their dividends more than offset the drops. The utilities sector leader was Emera Inc., with a 73% total return. IE
Taking the measure of dividend stocks
More investors are turning to dividend-payers to stabilize returns over time. Here’s a look at the leaders over the past five years
- By: Carlyle Dunbar
- August 2, 2011 October 31, 2019
- 12:02