Dividend Growth Investor

Must-Know Criteria for Picking Inflation Proof, High Dividend Stocks

MLPs are a nice way to generate high yields.However one should not invest everything in MLPs, since concentration i one type of asset is asking for trouble.

As for dividend investing in general however, one has to ask themselves how sustainable the dividends are before buying that income stock. Most investors were lured by double digit yields in certain canadian income trusts, only to have their dividends cut or eliminated and suffer huge capital losses in the process.

Special structures such as Canroys, MLPs, Reits are a nice way to generate high current income. But what would happen if tax law changes are implemented which abolishes the current structure of these trusts/partnerships? This has alread happened in Canada in 2006, and after 2-3 years there is still much uncertainty about what would actually happen. If you are a retiree who depended heavily on the income from these Canroys, how would you feel with all that uncertainty?

When you are investing, you have to visualize different scenarios and construct your portfolio accordingly. I own dividend aristocrats, MLPs, Certificates of Deposit,and some TIPs both in taxable and tax defered accounts, and know that I no matter where the market or the econony goes, I would keep generating enough income to sustain my standard of living.

Beware 'Dividend Aristocrats' that Actually Offer Low Yields, No Real Income

Cliff,

A stock that yields 3% today but is growing its dividends at 12% for the next 12 years will provide a 12% yield on cost by 2021.
Historically Dow Jones Industrials Index dividends have grown by 5-6% over the past century. It's true that we are in a bear market now and in a recession, but if you look REALLY long-term ( like 3-4 decades from now) I am confident the yield on cost on an investment in S&P 500 will be much higher and more tax efficient in comparison with the canroys you have been touting..

Most of the Canroys which yield 12% today, were also yielding 12% 6 months ago despite huge dividend cuts in the sector. If you bought PGH at 18 in Jan 2008 when the monthly dividend was at 0.22, you could have thought that you were getting a good deal. Currently with a 0.08 monthly dividend you are actually getting something close to a 5% yield on cost. You MUST learn the difference between current yield and yield on cost before you bash the dividend growth stocks in general.

And last but not least, do not chase yield blindly. Most of these income trusts pay variable dividends every month out of their cash flow. If oil and gas prices rise, your income rises. If oil/gas prices fall, your monthly income falls. The payout is very high as large portion of it is a return of capital, and you can't safely live off the income. Also In order for the canroys to grow they must sell more stock or debt, since they are paying most of their cashflow in dividends.

Most Dividend Aristocrats on the other hand not only regularly increase dividends, but also buy back shares, thus making you stock worth more.

Good Luck in your quest for income. What truly matters to dividend investors is not only current income, but the ability to maintain/sustain and even increase it over time.

2011, A Canadian Tax Odyssey: Canadian Income Trust Investors' Guide

Cliff,

I enjoyed your article. However it seems that you are only looking at the best case scenario by saying the following:
"when energy prices recover to 2008 highs and beyond, the yields and prices on these will also recover,"

What happens to distributions from Canroys if tax rates go up to 30%-45% and if oil prices maintain their current levels? Then a 10% distribution would be cut to 5% - 7%, which won't be as good. What if distributions are cut even more by 20% - 30% due to fluctuations in oil/gas prices?

One should always think about probabilities when constructing a portfolio. Concentrating your portfolio in just one sector, or one vehicle is a recipe for disaster in the making..

I do agree that a portion of one's portfolio could be allocated to CanRoys.. But their fluctuations in income do not prove a dependable and stable income stream that normal oil and gas companies such as BP or CVS would provide.

The High Dividend Stock Investor's Collapsing Dollar Survival Guide, Part 3

What happens if the dollar does not collapse, but all the other currencies depreciate against it? When the WHOLE WORLD quotes their currencies exclusively against the dollar, and any major central bank in developed or developing countries is happy to keep dollar reserves you are talking about collapse of the dollar. Has it ever occured to you that the dollar is a global currency, not a local currency?

What happens if the deflationary cycle keep on going? The portfolio needs some allocation to assets that would do ok in a deflationary environment.

The High Dividend Stock Investor's Collapsing Dollar Survival Guide, Part 1

Aren't you afraid that concentrating your portfolio mainly in high yielding sectors will hurt your portfolio in the long term? for exampl many investors seeking the highest yielding financials got burned when the dividends were cut. Isn't it better to obtain a balances approach between dividend growth and dividend yield?