2016 Dividend Income Update

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Includes: BNS, CAT, CBWBF, CDUAF, CVS, EMR, ENB, ESVIF, HMCBF, IBM, MCD, NTIOF, NVO, POT, RCI, SU, XOM
by: Dividend Growth Investing & Retirement

In 2016, I made $4,039.79 in Canadian dividends and $1,266.04 in US dividends, for a Canadian equivalent total of $5,706.77. Canadian equivalent interest payments were $3,889.50, which resulted in net dividends of $1,817.23, which is almost double the $957.05 in net dividends I received in 2015.

DGI&R Quarterly Dividends & Interest

DGI&R Quarterly Dividends & Interest

*In 2014, I liquidated most of the portfolio to put a large down payment on a condo Ms. DGI&R and I bought and moved into. This is why dividend income drops off in the second half of 2014. Since then, I've been slowly building back the portfolio.

Why is there interest on my dividend income graph?

We purchased the condo with a re-advanceable mortgage, which is basically a traditional mortgage and a secured line of credit combined. As the mortgage portion is paid off, the credit limit on the line of credit portion increases. I've been paying off the mortgage aggressively, and I use the line of credit to invest with when I find a reasonably cheap dividend growth stock to buy. That's why you see the interest in yellow growing over time along with dividends. There is some margin interest included here too, as I currently get a 2.1% margin interest rate on my US purchases, whereas my line of credit interest rate is 2.7% Canadian. I've been keeping a small margin loan that will eventually be paid off with future USD dividends.

Borrowing to invest is a risky strategy and not one that I'd recommend for the average person, but so far it has been comforting to see the black line slowly creep up. The black line represents total dividend income in Canadian dollars (USD dividends have been converted to a Canadian equivalent) less the total interest paid in Canadian equivalent dollars.

I've noticed that because my investing criteria is fairly rigid, I'm not able to buy stocks as fast as I pay off the mortgage. I'm usually only buying a few stocks in the year, as the valuation I look for doesn't come around a lot. For instance, in 2016, I made 6 purchases - 4 of them in January 2016 when people were freaking out about China and a few other things. The other two were more recent in November and December, when I purchased Novo Nordisk (NYSE:NVO) and CVS Health Corp. (NYSE:CVS).

Back to the dividends...

The dividend income almost doubling from 2015 to 2016 is mostly from new stock additions rather than dividend growth. In fact, if I look at portfolio dividend growth in 2016, it is rather dismal, coming in at around 3.8% (yellow below). This doesn't even factor in the dividend cut from Potash Corporation of Saskatchewan (NYSE:POT) that my portfolio endured (I sold my Potash shares shortly after the dividend cut in January 2016).

Considering I'd like at least 8% annual dividend growth, 2016 wasn't a good year for me at all.

DGI&R Dividend Growth Table

To estimate future dividend growth, I used ValueLine's 3-5 year estimates and my own conservative quick and dirty (DGI&R Est) estimates for stocks I couldn't get ValueLine information for. I'm estimating about 6% (green above) future annual dividend growth, which is still below my 8% target. This tells me that I need to add more high dividend growth stocks to the portfolio, which I have been doing with my recent additions of CVS Health Corp. and Novo Nordisk.

Weak Diversification

I'm still in the process of building my portfolio up, so it is not diversified very much right now, and that was reflected by low dividend growth in the energy sector, which affected a number of my holdings. Of the five stocks that didn't increase their dividend, four were in some way affected by low oil prices in the energy sector. I expect some choppiness with dividend growth as I build the portfolio out, but in the future, I expect a more consistent level of dividend growth as I become more diversified over the next few years. I've been noticing that different sectors become value-priced at different times. For instance, when oil prices were low, I was able to pick up some energy stocks at low valuations, but I wasn't really buying much else, as other stocks appeared expensive. This has the short-term effect of being overweight in the energy sector, but as I build out the portfolio into other sectors, this problem will fix itself.

DGI&R Sector Allocation

DGI&R Sector Allocation

As you can see, I have a lot of financials and energy stocks right now. As a consequence, I don't plan on adding any more money to these sectors. When I get my portfolio up to its target size in a few years, financials will be around 20% and energy will be around 10%.

Debt Matters and Rogers Communications

The one stock that wasn't affected by oil prices, but still didn't increase its dividend was Rogers Communications (NYSE:RCI), which is a Canadian telecommunications company. The company didn't increase the dividend in 2016, and instead, kept the quarterly dividend at $0.48 CAD. I was a little surprised when RCI didn't increase its dividend in 2016, as it had a reasonable payout ratio and dividend streak of 11 years. The company didn't increase the dividend because its debt levels had increased over the years, and it is now focusing on paying its debt down to a more manageable level. Specifically, RCI is targeting a leverage ratio of 2.5. I'm not expecting a dividend increase in 2017, but I expect increases in 2018 and thereon.

Rogers 2016 Q4 Conference - Slide 12 of 14

Tony Staffieri, Chief Financial Officer of RCI, had this to say on the January 26, 2017 conference call:

"While we are seeing good trending in 2016, we still got work to do and want to continue to see it moving towards 2.5. We are in the middle of the CEO transition. So as most of you noted, it's kind of a bit impractical for us to make a long-term decision on dividends during this time period. And so we sort of commonsense approach is to not do it right now and that's what you see there. In terms of when we do it, don't want to get too far ahead of ourselves, but I think the metrics to keep watching our cash flow growth and movement on the balance sheet as the key ones."

So the lesson here is that debt matters, which is why I typically like to see a credit rating of BBB+ or higher before I invest. The exception is utility companies, where I'm willing to go down to BBB or higher.

Summary

While 2016 was a disappointing year when it comes to dividend growth I expect a brighter future. My long term annual dividend growth goal of 8% is ambitious, but certainly achievable. I think I need to focus a bit more on high dividend growth stocks as I continue to build my portfolio into non-energy and non-financial sectors. My investing horizon is very long term, so I expect to have low dividend growth years like this from time to time. Much like stock prices I expect a certain amount of fluctuation, but as a long term investor I expect to reach my goals in the end. The ride may be bumpy, but if I stick with it I should be fine.

Disclosure: I own shares of Bank of Nova Scotia, Canadian Utilities, Canadian Western Bank, Caterpillar, CVS Health Corporation, Emerson Electric, Enbridge Inc., Ensign Energy Services, Exxon Mobil, Home Capital Group Inc., International Business Machines, McDonald's, National Bank of Canada, Novo Nordisk ADR, Rogers Communications, and Suncor Energy. You can see my portfolio here.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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