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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17 Responses to "November 2011 Dividend Income Update"

  1. @My Own Advisor

    Berkshire owns multiple insurance companies, but ya Aflac is there big one. With all the buy backs Buffett is doing right now, I am really tempted to take a sizeable position in BRK (relative to my meagre portfolio). I don’t know about growth opportunities, but I do think the company is severely undervalued, and more important so does Buffett!

    Reply
  2. I love reading dividend updates from other people! Congratulations on yours. It makes me think that I too may get somewhere (I just got out of high fee mutual funds in May of this year and have been learning lots from reading sites like yours). I do have a question though – when you calculate your dividend income for the month/year, do you include the income generated inside RRSP and TFSA accounts as well as your unregistered accounts/transfer agent holdings? I am trying to develop some kind of tracking system of my own – hence the nosiness.

    Reply
    1. Hey Candrip!

      Thanks for the kind words, very nice of you.

      When I calculate my dividend income for the year, I include dividend income generated inside my TFSAs and unregistered portfolio. I do not include transfer agent holdings, because I no longer have holdings with them. At the time, I did include that income in my calculations.

      I do not include dividend income generated inside my RRSP. Maybe I should? The reason I do this is, rightly or wrongly, I consider my RRSP account “untouchable” for years to come. My unregistered portfolio and TFSAs on the other hand, I will draw from in another 20 years for living expenses in early retirement.

      Thoughts?

      Reply
  3. I just bought more GWO. It’s been the real dog in my portfolio since ’09, but I’m happy to load up on it at these levels. There is risk of a dividend cut though, this sector is struggling for sure.

    Reply
    1. Be greedy when others are fearful eh? 🙂 Good on you. Worse case, I suspect we’ll see a few mergers and consolidation activites in some of these organizations.

      Dividend cuts, as long as this low interest rate environment continues for another couple of years, are almost evitable I think.

      Reply
  4. The Lifecos are getting murdered right now because of the long-term low interest rate environment that is without precedent. They have a much leaner business model than the banks do, and generally don’t take as much risk. There is little doubt in my mind that these companies will bounce back when this de-leveraging is winding down in a couple of years. If Warren Buffett believes in insurance companies, then I have to believe that this is a business cycle that will circle back like they all do. They have solid durable competitive advantages within Canada, and their management has proven that even in these tough times, they can still reward shareholders with a dividend while keeping enough liquidity on hand to keep the company sustainable.

    Actually, if you really want to get creative and re-balance, or follow Buffett’s advice, now is the time to by these lifecos! In a worst case scenario (which I don’t think has much chance of happening) you have to think a takeover would offer a serious premium to shareholders.

    Reply
    1. @MUM,

      These companies should bounce back, but their pain is real today for sure. The pain might stay for another few years. I liked your comment about Buffett. Isn’t he a huge owner of AFLAC?

      Worse case, I think you’re right, a huge takeover happens and we see tons of consolidation activities. Time will tell won’t it? 🙂

      Reply
  5. MOA,

    Great job on the dividend income for 2011. Averaging over $400 a month in passive income is huge man. Good stuff!

    I can’t comment on the dividend sustainability of some of the companies you mentioned as I am unfamiliar with them, but the key is staying diversified so that when/if a holding does cut the dividend your income doesn’t suffer much. You’ve obviously mastered this.

    Best wishes!

    Reply

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