July Dividend Income Report: What Will Happen If The Trade War Continues?

|
Includes: AAPL, ADWPF, ANCTF, ANCUF, BLK, CAE, DIS, ENB, FTS, GNTX, GTX, HAS, ITPOF, LAZ, LSDAF, MGA, MSFT, NTIFF, NTIOF, REZI, RY, SBUX, SYZLF, TXN, UPS, V
by: The Dividend Guy
Summary

When you take a moment to step back and watch financial news from a distance, you realize that most of news is grouped into a handful of narratives.

Commercial tension was the most important narrative in 2018 and it continues into 2019.

Let's look at how last month went.

In September 2017, I received slightly over $100K as a result of the commuted value of my pension plan. I decided to invest 100% of this money into dividend growth stocks. Each month, I publish my results. I don't do this to brag, I do this to show you it's possible to build a portfolio during an all-time high market. The market will crash… eventually. In the meantime, I'd rather cash some juicy dividends!

What Will Happen If the Trade War Continues?

When you take a moment to step back and watch financial news from a distance, you realize that most of news is grouped into a handful of narratives:

  • The market is going to crash (this is a very popular one every year, no matter the circumstances)
  • Where will interest rates go? (higher, lower or nowhere)
  • Debt level (governments, businesses, households)
  • Oil market saga (there's always a new story to tell in the energy sector)
  • Trade War (this is the most popular one recently)

The main financial buzz themes change from one year to another and each of them comes with the same promise it can't keep: this time is different.

Each year, you have an incredible legion of prophets (read financial analysts, bloggers and other investors) telling you how this year's theme will impact the world forever. Why do they do that? It's simple: because fear sells.

A few years ago, Greece was about to bring decades of darkness on the Eurozone due to its debt level. Before that, the entire capitalist system (ruled by greedy banks) was to collapse and the only secure investment was gold. A couple of years before that, the price of oil would reach $200 per barrel and Alberta would likely become the most profitable province on the planet. And so on…

Those narratives have an impact on the market and how we invest because most of those stories don't come from bozos on the street, but most likely from well dressed, educated guys on "Wall Street."

Commercial tensions have been a strong narrative

Commercial tension was the most important narrative in 2018 and it continues into 2019. We had the NAFTA negotiations that created a great deal of uncertainty. Then the Brexit keeps creating confusion because nobody knows how this story will end. Most importantly, the "Royal Rumble" going on between the U.S. and China will definitely leave marks on both countries' economy.

Several sectors are hurt by tariffs and other commercial actions. This creates a great deal of opportunity if you are looking to put some money at work for you. In fact, this is the only outcome of a longer conflict: more buy opportunities will rise if the trade war continues.

The market hates uncertainties and trade wars create a huge cloud ahead. If you are a long-term investor, you need to keep your ship's rudder steady and you will navigate through those troubled waters. Because nothing else will happen if the trade war continues. Markets will surely be volatile, but they would have been for another reason anyway. Make sure you stay invested and cash those juicy dividends in the meantime!

Let's look at how last month went.

Numbers are as at August 7th, 2019 (during morning):

Canadian portfolio (CAD)

Company Name

Ticker

Market Value

Alimentation Couche-Tard

OTCPK:ANCUF OTCPK:ANCTF

$6,986.64

Andrew Peller

OTC:ADWPF

$5,893.00

National Bank

OTCPK:NTIOF OTC:NTIFF

$4,991.20

Royal Bank

RY

$6,014.40

CAE

CAE

$7,042.00

Enbridge

ENB

$6,979.35

Fortis

FTS

$5,286.10

Intertape Polymer

OTCPK:ITPOF

$5,273.99

Lassonde Industries

OTC:LSDAF

$3,937.29

Magna International

MGA

$4,417.00

Sylogist

OTC:SYZLF

$2,293.08

Cash

$110.30

Total

$59,198.48

My account shows a variation of -$136.55 (-0.2%) since the last income report.

This was a pretty boring month in terms of variation. In fact, the numbers would have been greater if I had pulled them on August 1st. The trade war keeps coming back in the news, but this market volatility didn't prevent me from discovering a great business.

Bought 197 shares of Sylogist @ $11.20

I have been building cash in both my CAD and USD accounts for a while now. As I was doing research for my DSR small cap dividend yield newsletter, I found an interesting company. This is how I converted most of my USD into CAD and pulled the trigger on Sylogist. Here's our analysis:

Business Model

Sylogist Ltd. is a software company that provides Enterprise Resource Planning solutions, including fund accounting, grant management and payroll to public service organizations. The company operates in only one business segment - the Public Sector. It receives maximum revenue in the form of subscription maintenance. Geographically, the company offers its services to the United States of America and United Kingdom regions. The company counts over 1,000 customers worldwide.

Investment Thesis

Who doesn't like a company offering overall improvements in business processes, quality and systems control through their services? Sylogist shows strong revenue, EPS and dividend growth. It also offers a surprisingly high yield for a small tech stock. Through their Enterprise Resource Planning (ERP) solutions, SYZ can help both public and private sectors to manage intellectual property. Knowing how managing data has been crucial for businesses lately, SYZ is at the right place at the right time. We like their client diversification reaching over 1,000 customers worldwide, including local and national governments.

Potential Risks

Ah, technology, isn't that an exciting topic? SYZ makes it even more exciting through its growth by acquisitions model. The problem with such hype is the bubble is liable to burst at any time. SYZ also shows great volatility in its stock price. Between 2014 and 2019, the stock was found at lows of ~$6 and highs close to $15. However, shareholders only saw a 16% price appreciation over the past 5 years. Keep in mind, though, we are talking about a small company that could go either way. This could be the next Open Text, but it could also become the next BlackBerry…

Dividend Growth Perspective

If Sylogist wasn't trading on the TSX venture, it would be part of the Canadian Dividend Aristocrats. In fact, it is the only stock on the TSX venture to show 8 consecutive dividend increases. The past 5-year and 10-year dividend growth rates are impressive, and management also rewards shareholders with a few special dividends from time to time. What's not to like? Oh, did you ever wonder why such small company can pay such a nice dividend? That's because there is no debt on the balance sheet.

Numbers are as at August 7th 2019 (during morning):

U.S. portfolio (USD)

Company Name

Ticker

Market Value

Apple

AAPL

$6,060.19

BlackRock

BLK

$5,988.50

Disney

DIS

$5,959.35

Garrett Motion

GTX

$37.68

Gentex

GNTX

$6,370.85

Hasbro

HAS

$5,132.68

Lazard

LAZ

$3,418.02

Microsoft

MSFT

$7,973.40

Resideo Tech

REZI

$85.25

Starbucks

SBUX

$8,038.87

Texas Instruments

TXN

$5,932.50

United Parcel Services

UPS

$4,216.89

Visa

V

$8,553.50

Cash

$67.23

Total

$67,839.36

The US total value account shows a variation of +US$356.61 (+0.5%) since the last income report.

It was a great month for many of my holdings, but as I moved my USD cash ($707) and new trade war news happened before I pulled out the numbers, the progress I did not too long ago doesn't show anymore. However, I have companies posting great results:

Hasbro is riding on Disney

Hasbro killed it this quarter and beat both EPS and revenue growth expectations. Results were supported by solid growth across the franchise brands business (+14% Y/Y) and partner brands business (+3%) in Q2, while Hasbro Gaming lagged (-8%). The emerging brands business saw sales rise 28% during the quarter off the strength of the the Power Rangers toy line. In other words, look at how Disney is doing (or the box office!) and you will know ahead of time how Hasbro will perform. With the upcoming movies Frozen II and Star Wars later in 2019, we should be good for a while.

Visa only knows double-digit numbers

Visa did it again and beat both EPS and revenue growth with double-digit numbers. Q3 payments volume of $2.23T increases 8.7% Y/Y on constant currency basis; cross-border volume rises 7%; processed transactions of $35.4B up 12%. Visa set the tone for the full-year guidance with annual net revenue growth of low double digits on a nominal dollar basis, with ~15 percentage points of negative foreign currency impact and more than 1.0 pp of positive impact from the new revenue accounting standard. Visa used $2.1B to buy back shares this quarter.

Gentex is showing strength in a difficult environment

GNTX managed to beat both EPS and revenue growth expectations with modest numbers. However, this quarter shows that Gentex continues to be on the right path for growth over the long haul. The company revised 2019 calendar year guidance for improvements in gross margin, depreciation and amortization, and effective tax rate ranges. This lifted up shares to new highs. Considering the company is debt free and continues to buy back shares (3.1M this quarter) on top of their yearly dividend increase, we think there is more upside going forward.

My entire portfolio updated quarterly

Each quarter, we run an exclusive report for Dividend Stocks Rock (DSR) members called DSR PRO. The PRO report includes a summary of each company's earnings report for the period. We have been doing this for an entire year now and I wanted to share my own DSR PRO report for this portfolio. You can download the full PDF giving all the information about all my holdings. Results have been updated as of June 21st.

Download my portfolio Q2 2019 report.

Dividend income: C$111.15 (+6.8%)

July is one of my smallest months in term of dividend. I have only 3 companies paying their dues this month. At least, all of them show higher dividends compared to last year.

The growth is compared to July 2018 (not a necessarily a recent dividend increase):

  • Andrew Peller: +4.8%
  • Gentex: +4.6%
  • Disney: +4.8%
  • Small currency headwind

Canadian Holdings payouts: C$22.33

  • Andrew Peller: $22.33

U.S. Holding payouts: US$66.63

  • Gentex: $27.03
  • Disney: $39.60

Total payouts: C$111.15

*I used a USD/CAD conversion rate of 1.331.

Since I started this portfolio in September 2017, I have received a total of C$5,253.30 in dividends. Keep in mind that this is a "pure dividend growth portfolio" as no capital can be added into this account (it's a LIRA). Therefore, all dividend growth is coming from stocks and not from additional capital.

Final thoughts

The past month is showing, once again, that the narrative controls the market, but great companies continue to progress in the meantime. There is usually a lag before the market realizes that an amazing business is doing well. It's up to long-term investors to keep up with their strategy and not abandon the boat. There is no iceberg coming in!

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.