Back at the beginning of 2012, I played Nostradamus and tried to call the shots on a bullish versus a bearish market for 2012. It appeared that I was right and I even called the bluff on the "potential" dividend bubble. So, I thought it would be interesting to look at what we can expect in 2013 for dividend investors…
Bullish or Bearish for 2013?
As I did back in 2012, I started my analysis by looking at cold, hard facts. It can be exciting to think that another Black Swan event is coming and that the stock market is going to collapse but I'm leaving this job to the media and I will concentrate on a few graphs coming from the US.
In the first chart, I am looking at the employment creation (in thousands). After a slow summer, the US employment market seems to have picked up steam and should continue to show some strength. Since 70% of the US GDP is generated by its consumers, you want them to have a job! And so, employment creation is the first step for a healthy economy. I am also happy to see that Sandy didn't hurt the employment market too much.
It's one thing to create jobs but it's another to make sure that all Americans keep their existing ones as well! The unemployment rate has been dropping for the past 6 months which is great news.
Finally, new home construction is another strong indicator to know where the economy is heading. In order to be considered at "full speed", the US market should generate an annualized rate of 1 million new houses. We are currently hovering right under the 900,000 bar which is also another great sign.
As you can, the general economic environment is not booming but is heading towards a brighter future. I think that the consumer sector will benefit from this relatively strong base. Stocks like Kimberly-Clark (KMB), Procter & Gamble (PG), Campbell Soup (CPB), General Mills (GIS), Kellogg (K), Heinz (HNZ), Safeway (SWY), Walgreen (WAG) should perform well in this environment.
Where Will You Fall After The Fiscal Cliff?
(Please note that this article was written on December 27th and no Fiscal Cliff arrangement had been concluded at that time.)
At the time of writing this article, no Fiscal Cliff arrangements were made yet. One way or another, I truly believe that we will see some kind or arrangement. Chances are that dividends are going to be taxed more in the future.
While it seems to be the end of the world today, please keep in mind that US dividends used to be taxed at a much higher level not so long ago. It seems hard to imagine, but back in the 90s (and early 2000s), dividends were taxed a lot more. It is true that we saw several companies starting to pay or increase aggressively their dividend payouts once the tax breaks came in. However, there are companies (notably dividend aristocrats and dividend champions) that have always been increasing their dividend.
This is why I'm not too concerned about the fiscal cliff and the end of the dividend tax break. The main difference is that we will be more limited as investors in the choice of dividend growth stocks. While investors using tax sheltered investment accounts won't be affected too much by the tax increase, the decision to pay dividends by companies will be affected to some extent.
In fact, there are several companies paying dividends to keep investors' interest in their stocks (notably major mutual funds since they have several clients that are invested in non-registered accounts). This is why I believe that the number of companies increasing their dividend (or paying any dividend at all!) will be affected by the fiscal cliff.
You can see this impact when you look at the futures on the S&P500 expecting a drop in dividend payouts. There are also many companies that paid a special dividend in 2012. Don't expect that to happen again in 2013!
The key to success will remain in choosing solid companies with a solid dividend growth history… oh wait! This is what I have been doing anyways.
Where Will The Dividend Growth Be?
The first thing I'll tell you is that I'm convinced that the US stock market will do better than the Canadian for a third year in a row. The economy is more diversified and seems to be on a good trend. US companies can count on emerging markets' growth as many of them operate more than 50% of their activities outside their main country (which is pretty rare to find in Canada). The other reason is that the most profitable economic sector of the Canadian market, the financials, will probably be flat in 2013. The housing market is slowing down and the interest rate acts as a Damocles sword over their head. I'm pretty sure that Canadian banks won't go through their best year in 2013.
The thing that could "save" the Canadian economy would be a boom in the oil industry linked to a rolling global economy. If you are that optimistic about Europe and China, you can invest your money in Canada before the US but, if you are like me, your next stock picks might be on the US side.
Personally, I'll be looking at simple and diversified business models with a long dividend growth history. I won't ignore the impact of the fiscal cliff and will be looking at stocks with a longer dividend growth history. I might run a filter to look at the past 10 years to make sure I pick stocks that will continue to increase their dividend and not simply follow the investing trend.
It's not a coincidence that I have picked companies such as Abbott (ABT), Campbell (CPB), General Mills (GIS), Heinz (HNZ), Johnson & Johnson (JNJ), Kellogg (K), Kimberly-Clark (KMB), Mattel (MAT), McDonald's (MCD), Procter & Gamble (PG), Safeway (SWY) and Walgreens (WAG) to be part of the best 2013 dividend stock picks on the US market. I truly believe that consumer and health basic products will be good sectors to invest in for 2013.