Dividend investors encouraged to keep the faith

Canadian dividend investors may be disappointed about how their portfolios have performed during the Covid-19 pandemic, but dividend strategies should be tweaked rather than abandoned, a report from Richardson GMP says.

Over the past 20 years, dividend stocks have outperformed the broader Canadian market: 8.1% for the Dow Jones Canada Select Dividend Index compared to 6.8% for the S&P/TSX Composite, the report said. They’ve also offered a smoother ride, with less exposure to downturns.

That changed this year, when “[d]ividend strategies followed the market down just as fast” and have lagged the broader market recovery. A major factor is the role of financial leverage during the Covid-19 pandemic.

“Companies with greater leverage, either on their balance sheet in terms of the capital structure or from an operational leverage perspective, have really underperformed,” the report said. “In contrast, those with limited debt, more cash and greater variable cost structures have performed very well.”

A report last month from Capital Group said dividend cuts and suspensions have jumped to the highest level in more than a decade. This includes several firms in Canada’s oil patch.

Last week, the U.S. Federal Reserve ordered banks to halt dividend payouts until Sept. 30.

But Richardson GMP encouraged dividend investors to keep the faith — with some adjustments.

“Don’t let one bad bear market for dividends have you throwing in the towel on the strategy,” the report said.

One reason is that many dividend companies are now inexpensive, which the report said was “compelling.”

Another reason is the likelihood of a prolonged period with low interest rates.

“Dividend investing benefits from falling yields, which has been a long trend over the past 30 years,” the report said.

“This has benefited some dividend payers more than others: utilities and telcos benefited greatly; banks are in the middle; and lifeco and more economically cyclical companies are at the other end of the spectrum. Ensuring a balanced exposure across the spectrum is ideal, especially if we start to see rising bond yields in the decade ahead.”

The report also encouraged investors to diversify and create room in portfolios for some growth stocks.

“Complementing a core dividend portfolio with some growth or international exposure may reduce your portfolio’s dividend yield, but it can have great growth and diversification benefits in the longer term,” the report said.