November 2011 Dividend Income Update

Dividends should not only be viewed as a source of passive income but one of the most important signals a company can provide to its shareholders about the company’s financial health.  Just like personal health, financial health is a good thing but some investors don’t care about healthy eating.  They like the excitment that comes with all kinds of sugary sweets or in financial terms, frequent trading.   Not me.   I’m a boring investor.  I’m trying to hold only healthy companies that pay healthy dividends because I want passive dividend income to be part of my retirement plan.

For a few years now, quarter after quarter most of the dividends paid to us are reinvested – this puts the power of compounding on our side.   I like it that way – I don’t need to think about the markets very much.  This is because regardless of what happens in the equity markets, 400-point slides or rebounds, most established companies that have a long history of paying dividends will continue paying dividends and in some cases, increase them over time.

Most companies that is.

Last week it was reported while big banks were making big cash, insurance companies continued to struggle.  The worst might not be over for them.

In 2009, Manulife Financial slashed its dividend in half.  Sun Life Financial might be next, a company I own.  For July to September 2011, Sun Life posted a loss of over $600-million.  Sun Life’s dividend yield is now over 7%, which is dangerous in my opinion and not sustainable years down the road.  This low rate interest environment is certainly hurting Manulife and Sun Life, two of Canada’s big-three life insurance companies, but I have absolutely no control over rates.   Actually, I don’t have much control over anything, except taxes related to my investment choices, investing fees and my behaviour.

Which brings me to this…

I’m sure analysts and economists who are much smarter than I am, know much more about these companies that I do and could make more timely decisions about them.  But I’ve learned from my own experience that sticking with a plan will reward me as an investor.  That plan, for now, includes sticking by Sun Life and other lifecos in my stock portfolio.  Even though some of these companies are down about 40% over the last couple of years, I haven’t sold.  Until companies in this sector stop paying dividends or significant changes occur in their business strategy, I’m going to keep investing in them.  If anything, I’m getting these companies at super cheap prices.   Maybe that’s a great thing because I’ll look back years from now and smile with some lessons learned about patience and staying invested.  Maybe this strategy is not very good because I’m too stubborn or ill-informed to know if my good companies are going bad and I need to “get out”.

For every Yin there is a Yang in my portfolio and diversification and patience should reward me as an investor over time.  I’ve read about it time and time again and I believe in it as well.  The math also seems to be proving this.  For the 2011 calendar year, we’re on pace to earn just a few dollars short of $5,100 in dividend income as long as the companies we own continue to pay.  That’s almost $600 more than where we started 11 months ago.  We’re still a long distance away from our ultimate dividend income goal of $30,000 in another 20 years but we’re getting there, one quarter at a time, watching companies struggle and thrive alike.

Staying invested has worked for others, it has worked for us so far and I’m convinced it will work in the long run to produce some great passive income.  However, watching messy stock slides in the Canadian lifeco sector are not easy to stomach.

What do you think?

Should I be worried about Canadian life insurance companies in my portfolio?

Do you think dividend cuts for Manulife, Sun Life, Great-West Life and other lifecos are on the way in 2012?

Or, instead, should I be celebrating about the stock prices while they are low?

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