April 2021 Dividend Income Update
Welcome to my latest dividend income update for 2021.
You can find my previous dividend income update right here.
I get this question all the time but I don’t mind answering it this month too!
Dividends are payments from a corporation to shareholders – you are an owner/shareholder in that corporation. When stocks you own, pay out dividends, you are essentially receiving some of its retained earnings that a company has already created through its cash flow and profit-making activities.
It’s important to note when dividends are paid, the effect on the balance sheet is a decrease in the company’s retained earnings and its cash balance. In other words, retained earnings and cash are reduced by the total value of the dividend. That may or may not appeal to all investors. Shareholder value is created in many ways!
Dividends are not the only way corporations may reward shareholders but they can be a valid way to increase shareholder value for a few reasons:
- Reason #1 – dividends are core to company strategy. Potentially there are no current companies to acquire, maybe company debt is under control, and/or there is already a healthy stream of cash to fund new company products or services. Therefore, it’s part of the company’s strategy to pay out a dividend and reward shareholders.
- Reason #2 – the company demonstrates it is on sound financial ground. Most companies that pay a dividend, especially long-term (as in decades) have a stable business model. I believe you really can’t fake dividend payments for very long. As an investor, it’s to your advantage to own shares in a company that makes large profits, consistently, with time. A reliable dividend can be a good sign of business strength. This is because unstable companies cannot divert profits directly to shareholders for very long.
- Reason #3 – a dividend paying company wants to attract investors. This is akin to company strategy. Some investors are more speculative and like risks for capital gains. Dividend-paying companies can attract a certain type of investor; one who prefers cash in hand versus the hope of capital gains. Such investors like the idea of earning income from their investments the same way people go to work to earn an income – it can be somewhat* of a dependable paycheck. *Of course, there are never any guarantees. Companies know there are investors out there who put a bias on dividends for investment selection purposes.
- Reason #4 – companies know investors like optionality. You see, in a perfect world, all businesses would allocate capital in a way to perfectly maximize the return on that capital. This would be done so reinvested money would go back into the business in way that pays off immensely for the shareholder value all the time (by increasing returns over time AND by continually reducing the company’s tax burden). Forget dividends for a moment, but regardless of what the company did, the goal would be to generate the highest possible return to shareholders. Of course, we don’t live in a perfect world and so sometimes the combination of dividends, capital gains, share buybacks, acquisitions, holding cash, or paying down debt is in the best interests of the company. The only challenge is, we only know those results in hindsight! So, a good way to consider a dividend as part of an investment approach is one of “optionality”. Dividends, that is some of the company profits paid to you as a shareholder, give you the choice: to increase or decrease your exposure to the business. Reinvested dividends, taking full advantage of that optionality, will increase stock exposure which is essentially looking at things from a total return perspective. On the other hand taking just the dividends, as cash, without any reinvestment whatsoever is the optionality part. You can simply take the money and run and spend it as you please… It’s yours to keep once paid.
I personally love dividends for this latter point and I’ve been a dividend investor for almost 15 years now since this approach helps me psychologically:
- I can reinvest the dividends and distributions paid as I wish, the “optionality” part, to buy more shares or ETF units on my schedule and what works for me.
- My portfolio is always working for me, I get paid to be a shareholder.
- This approach helps me psychologically for a buy and hold approach largely regardless of what the stock market does with price appreciation or price declines, including 20% or 30% declines (like those that happened starting March 2020).
- I save money on fund management fees. I own many of the same stocks the big funds own – and pay no management fee to do so! I can build my own ETF if you will.
- I believe my goal to “live off dividends” to some degree will ultimately serve me well in semi-retirement. I hope it will reduce any worries about when to sell stock or an ETF, as I ride out market calamity. I can simply take the dividends and distributions as cash and live off that for a period of time.
- Earning dividends is a great complement to my buy and hold approach using ETFs for long-term growth. You can read about my favourite, best, low-cost ETFs to ride market returns here.
What is dividend growth investing?
Taking dividends one step further, dividend growth investing is an investing strategy which involves investing in companies that pay dividends and those companies that tend to increase those dividend payouts to shareholders at least annually.
Since dividends are a large source of total stock returns, this strategy can make sense for many investors – investors not only get to participate in the dividend growth of the company (earning more income with every dividend increase) they may also get some stock price appreciation as well – combining for juicy total return.
Recall total return:
- Is the actual rate of return of an investment or a pool of investments over a period,
- It includes interest, capital gains, dividends, and realized distributions, and
- At the end of the day, is a strong measure of an investment’s overall performance for any comparison purposes.
I wouldn’t call me a devout dividend growth investor since I do have some stocks in my portfolio, due to COVID-19/pandemic mainly, that have not yet raised their dividends in over a year. Is that a singular reason to punt those companies from my portfolio? Absolutely not for me.
In fact, I’ve held stocks even after a dividend cut. Would you automatically sell a stock after a dividend cut?
Your mileage may vary.
April 2021 Dividend Income Update
Advisors, critics of this site over the years, and others have told me that dividends do not matter unto themselves. True to a point. But they are an important component of total equity returns as I have outlined above.
More so still, they really matter to me and my investing journey to date. I wouldn’t be where I am today without a plan I could stick to: the psychological support this dividend investing approach has provided me, has been essential to my success. Again, your mileage may vary.
This time last year, after suffering some admittedly unfortunate dividend cuts in my portfolio, we were on track to earn $20,250 that calendar year.
You might recall we ended 2020 a bit higher, earning $20,892.
With stocks and ETF units DRIPping along nicely this month, our money invested continues to grow without any new purchases. I have a bias to reinvesting our dividends paid as much as possible.
This month, we remain on pace to earn close to $22,500 by the end of December 2021 assuming some dividend raises occur, some more compounding occurs this year and we avoid some dividend cuts like 2020 brought upon us. We shall see!
Even if no dividend cuts or no dividend raises occur, I’ve calculated we should earn at least $21,649 this calendar year from our taxable account and TFSAs.
Using a metric I started here on this site, that continues to gain more traction with other bloggers around the blogosphere:
- $21,649 per year in dividends and distributions translates to earning roughly $2.47 per hour of every hour of every day even in my sleep (income/8,760 hours).
- That income could be considered earning the equivalent of earning $10.41 per hour assuming I work a 40-hour work week (income/2,080 hours) but that’s not quite true since some of that income is tax-free (thanks TFSA).
If our goal is to earn $30,000 per year, that will equate to earning $14.42 per hour.
Essentially, it would be nice see our taxable and TFSA accounts work for me 🙂
I look forward to sharing the next monthly dividend income update with you.
Thanks for reading and sharing. Bring your comments and questions below!