The return of the dividend

The roller-coaster, stomach-churning clichés are pretty apt descriptions for the world faced by many North American investors during the past year.

From a pre-recession high of 13,750 (Aug. 28, 2008), Canada's benchmark S&P/TSX Composite Index plunged 45 per cent to 7,566 (March 9, 2009), as North America's stock markets mirrored the crashing global economy.

Since the market woes of March, the TSX has gained more than 40 per cent, reaching 10,654 points on Aug. 19.

Many investors, however, may not be all that interested in trying to tame the equity serpent to repair their portfolios this time around, experts say.

Instead, stock buyers look ready to return to the investment strategy of their parents — buy and hold stable companies and bank those quarterly dividends.

"People will be looking for income, and I think a dividend is something they will want," said Peter Drake, vice-president retirement and economic research at Fidelity Investments Canada, a large investment company.

Reading smoke signals

And a lot of firms have already noticed the subtle shift.  In the past few months, a number of publicly traded companies have taken to issuing dividends after a hiatus or boosting their existing payouts.

In February, Rogers Communications Inc., the national TV cable and wireless company, hiked its annual dividend to $1.16 a share, up from the previous $1.00.

So did restaurant chain Tim Hortons Inc., pushing up its quarterly per-share payout to a dime from nine cents in the same month.

In August, Home Capital Group Inc., a Toronto-based trust company, hiked its quarterly dividend to 15 cents, a penny rise from the previous period. 

In that month, BPO Properties Ltd., whose holdings include First Canadian Place in Toronto and Bankers Hall in Calgary, doubled its investor payment to 30 cents a quarter.

Also, BCE Inc. said it would boost its annual dividend by five per cent to get the payout to $1.62 a share.

Cross-border move

The trend to higher dividends has not been a Canadian phenomenon alone, however.

U.S. companies — even financial institutions, which faced plunging stock prices and rising capital requirements in late 2008 and early 2009 — have raised their dividends.

Cincinnati Financial Corp., an investment company based in the Queen City, inched its regular quarterly dividend by half a cent to 39.5 cents US in August.

Greensboro, N.C., cigarette-maker Lorillard Inc. boosts its three-month dividend to $1 US from 92 cents.

In addition, New York's John Wiley and Sons Inc. announced a penny hike in its quarterly dividend to 14 cents, the 16th year in a row in which the book publisher increased its shareholder payout.

Cash in hand rules

What used to be a small portion of a portfolio's total return — the dividends paid by companies — has become more important, especially after the turmoil and capital losses investors endured over the past 12 months.

"Investors did lower their risk profiles since last fall," said Gareth Watson, director and senior equity adviser, ScotiaMcLeod's portfolio advisory group.

Back in the halcyon days after 2002, people were not as interested in dividend-paying stocks, he said.

Instead, investors were seeking the so-called "big score," when a company's future profit potential could jet-propel its stock price now.

By contrast, companies that paid out dividends, such as large electrical-generation businesses and the bigger telecommunications providers, were seen as market laggards, corporations that paid out valuable cash to shareholders rather than investing the money in new ventures.

Last year's global cash crunch, however, signaled the death of the long-running bull market in Canada and the United States.

As a result, potential capital stock gains quickly turned into real equity losses, as investors dumped most issues, even those players not facing liquidity issues.

Fast-forward a year and stock markets are recovering.  This time, however, investors are focusing on how much cash companies pay out rather relying upon the promise of future growth, experts said.

For example, the Standard & Poor's Canadian Dividend Aristocrats Index, which measures the performance of stocks that have increased their dividends over the past five years, has risen almost 50 per cent from its nadir in February.

Older investors

Canada's demographics favour these stocks, Fidelity's Drake said.

Statistics Canada predicts that almost six million Canadians will be 65 years of age or older by 2016, up a million-and-a-half from 2006.

Older investors tend to be more risk-adverse than younger Canadians and thus will be more interested in equity dividends and bond interest-rate coupons, Drake said.

Corporate policy also has played into the recent popularity of dividend increases, stock watchers said.

That is because some companies want to maintain their payout as a specific percentage of their corporate profits. As firm earnings rise, so does the face value of the stock dividend.

BPO Properties, for instance, doubled its dividend because the firm had $142 million in cash and near-cash on its books. In addition, the company also wants to maintain its dividend cash outflow as a set percentage of the balance statement, BPO said.

"(The increased dividend) reflects a payout ratio of approximately 60 per cent of our funds available for distribution, but more importantly is at a level we believe we can sustain through a real estate cycle," said Melissa Coley, BPO's vice-president of investor relations and communications.

Such a policy makes sense, said Scotiabank's Watson.

After all, a corporation wants investors to have confidence that the company's dividend is predictable and sustainable, he said.

"So (once you declare a dividend), you are going to make sure you can back up that payment," Watson said.

There are some companies, mainly in the spending-heavy technology sector, that still hoard cash to reinvest in their operations.

For example, Research In Motion Ltd., the Waterloo, Ont.-based maker of the BlackBerry portable communications device, has not declared a dividend in the past three years.

The company has maintained this policy despite having almost $2 billion US in cash and cash equivalents at the end of the first quarter of its current fiscal year.

Longer term 

Still, to some extent, the dividend trend is actually a return to normalcy after the ups and downs of the past few quarters in global stock markets.

'Paying dividends is not an extra' —Scotiabank's Gareth Watson

S&P estimated that, in 2007, payout cash comprised 6.7 per cent of per-capita American personal income. That was an increase from 4.8 per cent a decade earlier and a mere 2.8 per cent 20 years before.

"Paying dividends is not an extra," Watson said. "Dividend policy is one of the main ways management uses to return value to shareholders."

And, after a year in which investors have seen capital returns evaporate, that will likely be music to investors' ears.