Dividend health. It’s a topic du jour for many investors in these pandemic times. Many self-directed investors embrace dividend growth strategies. They can use it to seek quality and long-term total return potential. Many investors will use that growing income to drive that total return.
And of course many retirees use the dividends as a key source of income.
A dividend cut signals that management either does not have the monies to pay increasing dividends or they are very cautious about the future prospects. Obviously, a dividend cut is not a good sign. Many companies got out early and cut their dividends in the beginning weeks of these trying times.
Of course, we’ve had to close down much of the economy to shelter in place in order to control the virus.
The COVID-19 Kill Zone
Some business lines are simply shut down until further notice. You might say they are directly in the COVID-19 Kill Zone. That would include cruise lines, airlines, casinos, professional sports teams and stadiums, restaurants and cinemas, and all of the associated suppliers and spin offs.
I gave an example of that in …
As an example, just think of the spins off and ripple effects of professional sports. Most agree we will not be in the stands any time soon. No ticket sales. No ticket takers. No need to park your car and pay the man. No taxi. No Uber. No pre-game beers at the pub with wings and beers. No post game beers. No purchase of team shirts and paraphernalia. No one to show you to your seat. No park security. No game food vendors. No beer sales. Less TV production needs.
The COVID-19 walking dead stocks might include much of the non-essential traditional retail companies, mall REITs, automakers and all of the associated suppliers. Many industrials will feel the effects of reduced economic activity. Even fast food retailers that are allowed to stay open are seeing drops in traffic of 25% or more. It’s a long list.
Very few companies or sectors are benefiting from the COVID-19 period. Those benefiting in recent months might also have a much easier time as we transition to the new normal amid that economic restart. Of course many of the FAANG gang and Microsoft (MSFT) and others are seeing an incredible increase in business activity. The grocers are raking it in. Ditto for the Walmart (WMT), Target (TGT) and Costco (COST). Healthcare companies are doing well. Add in utilities. Lately, we’ve had to eat and keep the lights on and try to stay healthy.
COVID-19-friendly stocks and not so COVID-19-friendly
It’s not hard to look at your portfolio and see how it’s set up for the pandemic times. And hey, if there is a miracle vaccine in quick order, that may not be as big of a concern. As I’ve been suggesting, a vaccine will likely take a year or more. And even then, much of the economic damage will already be old news and the scars will be deep. The economic recovery may be trying. There is a new normal. Many businesses are disappearing and many more join the ranks every day.
When I look at our portfolio of 25 Canadian and US stocks, I don’t see anything in the direct kill zone. For my Canadian Wide Moat 7, it will come down to dividend health. I am happy to simply collect the generous dividends.
Here’s a recent update on the Wide Moat 7.
So far there have been no dividend cuts. The portfolio includes Canadian Banks by way of Royal Bank of Canada (NYSE:RY), TD (TD) and Scotiabank (BNS). There are two telcos, BCE (BCE) and Telus (TU) plus the two biggest pipelines in Enbridge (ENB) and TC Energy (TRP).
The big Canadian banks all reported this week and it was a similar playbook. They all held their dividends. Earnings were down by a significant amount as they greatly increased their loan loss provisions.
Here’s a great video on provisions courtesy of Mike The Dividend Guy who also writes for Seeking Alpha …
There are not very many impaired loans as of yet, but they are getting ready. Mostly they have provided mortgage holidays for many clients, up to 6 months. Customers are not in arrears as there are no loan payments to make. That will change of course once the economy reopens and we discover who can stand on their own two feet.
Here’s an example by way of Scotiabank earnings and communication.
Impacted by the COVID-19 pandemic, Bank of Nova Scotia recorded higher loan loss provisions of C$1.85B (US$1.33B) in the quarter ended April 30, 2020 vs. C$926M in fiscal Q1.
As Mike had pointed out, those monies that are set aside for the potential of bad loans cut directly into profits.
Other Canadian banks followed that theme with many even setting aside a greater ratio for loan loss provisions. The word on the street is that the banks would front end load the first COVID-19 quarter.
That said, there will be considerable stress in the sector. An alarming percentage of Canadians state that they would not have the funds to pay their mortgage next month. We see a similar situation in the US …
All said, the Canadian bank CEOs were very vocal early in the pandemic, stating that they were well prepared and that they were confident that they would not be forced to cut the dividends. That is an arrangement that they have with government agencies. They received support, they do not buy back shares or increase dividends. That would be a repeat performance from the Great Financial Crisis. It was holds across the board for the big Canadian banks.
Even the Bank of Canada stepped up to announce that they feel the Canadian banks are well prepared for the crisis.
And the Canadian banks are being good corporate citizens offering relief and help. Some reciprocal back scratching going on here.
My two pipelines
Obviously, the energy sector has been crippled. It has taken a hit thanks to Russia and Saudi Arabia flooding the market, in concert with greatly reduced global economic activity. In this crisis, I am happy to be a toll taker.
The pipes are reasonably full and we have those long-term contracts. Enbridge and TC Energy move oil and gas and are also power producers. They have a few oars in the water.
Once again, the CEOs were quick to come out and declare that their dividends were ‘safe’ and well protected.
Of course, that would assume that we get out of this mess in a year or two. If we move into a scenario of rolling recessions or a Depression, all bets are off. I’ll be clinging to our cash and bonds and those Walmart, Microsoft and CVS (CVS) shares.
Enbridge increased its dividend 9.7% on February 13, just as the coronavirus was starting to get the attention of North Americans. We won’t count that one in the COVID period.
A welcome surprise, TC Energy increased its dividend by 8% on March 30th.
From May 1 …
I am not a stock analyst, but if I were to guess, I would suggest that my pipelines might hold the greatest potential to keep the dividends intact through the crisis and into the new normal and that economic restart.
Calling on and counting on my two Telcos
There is certainly an oligopoly situation in Canada with respect to banking and Telcos. That’s why I hold them. But the oligopoly status may not be enough.
I used to joke that folks would choose their devices and WiFi before eating. I did not think that would ever become a serious choice or consideration. Of course, when push comes to shove, Canadians will put down the smart phone and head off to Loblaw (OTCPK:LBLCF) or Walmart for groceries.
The Telcos are obviously in a good spot. The world runs on technology. We need our connections and devices to live and to work. But the space is not immune to revenue declines. Roaming charges are down considerably. Many customers are calling in to reduce their packages and monthly fees.
But obviously these companies are not in the Kill Zone and they have maintained dividends.
In the recent quarter Telus and BCE both reported a revenue increase year over year. Again, dividends were kept at previous levels.
Our 17 US Dividend Payers
We all know the Apple story, it continues to perform. BlackRock has been a surprise performer. In the early stages it appears to be very well positioned, for a financial.
BlackRock delivered a 10% increase in March.
On April 30th, Apple increased its dividend by 6.5%.
I am more than pleased with these two growth picks. And given that they are growth stocks, my readers know that I will collect the dividends and also make homemade dividends by selling shares. That’s where they keep most of the value. They can be way bigger than those ‘real’ dividends.
Our 15 US Dividend Achievers
From April – My Dividend Achievers Quarterly Review. More Than Up To The Investment Challenge of COVID-19.
In early 2015 I skimmed 15 of the largest cap Dividend Achievers (VIG). Those constituents have increased their dividends for at least 10 years running. They’ve also passed the proprietary dividend health screens. That has turned out to be a solid combination.
Here’s the initial rationale for buying dividend stocks without looking.
The 15 companies.
3M (NYSE:MMM), PepsiCo (NASDAQ:PEP), CVS Health Corporation, Walmart (NYSE:WMT), Johnson & Johnson (NYSE:JNJ), Qualcomm (NASDAQ:QCOM), United Technologies (NYSE:UTX), Lowe’s (NYSE:LOW), Walgreens Boots Alliance (NASDAQ:WBA), Medtronic (NYSE:MDT), Nike (NYSE:NKE), Abbott Labs (NYSE:ABT), Colgate-Palmolive (NYSE:CL), Texas Instruments (NASDAQ:TXN) and Microsoft.
You can see that they are all set up in the business lines that are still open for business, and many are prospering. There’s tech, healthcare, pharma retail and staples retail. It’s a nice mix, and perhaps a lucky fluke? That said these sectors and types of businesses have a habit of rising to the top of a quality index.
We even have industrial 3M that is producing materials such as PPE that is needed on the front lines. Consumer discretionary Nike might prosper as everyone is out walking their shoes off. They’re going to have to replace those Nikes eventually. And now you might even be able to walk into your Nike store as we begin that economic restart. But …
A V-shaped recovery? Fuggedaboutit!
The market makers appear to like Carrier and Otis. I will likely sell Raytheon as it was not my skim. With some 50% exposure to the airline space it is in the ‘dead sector walking’ space. I am also not comfortable with the weapons component. I will continue to hold Carrier and Otis.
The Dividend Achievers Dividend Increases
On May 5th, PepsiCo increased its dividend by 7%.
In mid April, Johnson & Johnson increased its dividend by 6%. We’ll be getting that increased dividend payment in about 10 days. Thank you very much.
On May 21, Medtronic increased its dividend by 7%.
In March, Colgate-Palmolive announced a 2.4% dividend increase. They have held true. And recently they had a more than solid quarter. I knew this was a boring stock. I am happy to see it continue to be very boring.
Just sit there like a Teenager, I’m good with that.
In April, Qualcomm increased its dividend by 4.8%.
7 Dividend Increases – no cuts!
Walmart had a killer quarter of course. This is known as a recession-proof stock. It’s living up to its billing and the some. It would be surprising if Walmart did not continue with another small dividend increase.
Other candidates for dividend increases would be Microsoft, Walgreens, Nike and Texas Instruments. The situation looks promising for Carrier as well.
I’m obviously thrilled, so far, as to how this strategy has worked out. Being in a semi-retirement stage, the idea all along was to create a portfolio that could take on a major market correction. We also hold Canadian bonds and US Treasuries to go along with the higher quality stock selection. I’ve recently added some gold and Bitcoin as an additional asset class.
That said, a core approach has worked as well so far. The traditional balanced portfolio has barely felt a thing in the pandemic crisis. In that post you’ll see that the iShares asset allocation portfolio is positive year over year.
My readers will know that I’d think (guess) that there is much more volatility to come. We could retest those lows and then some. Or not, after all the stock markets have a mind of their own. When the first correction began in the early stages of this crisis, I wrote that the stock markets are ridiculous.
They continue to pile on in that silliness arena.
I’ll keep track of dividend developments. We are only in the first or second inning.
And how is your portfolio holding up? How are your dividends holding up? Please enter your scorecard in the comment section.
Who knows did I just jinx myself and that dividend record?
Thanks for reading.
Be safe. Be well. Be generous.
Author’s note: Thanks for reading. Please always know and invest within your risk tolerance level. Always know all tax implications and consequences. If you liked this article, please hit that “Like” button. Hit “Follow” to receive notices of future articles.
Disclosure: I am/we are long BNS, TD, RY, AAPL, BCE, TU, ENB, TRP, CVS, WBA, MSFT, MMM, CL, JNJ, QCOM, MDT, BRK.B, WMT, ABT, BLK, NKE, PEP, LOW, OTIS, CARR, RTX, BTC-USD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.