Weekend Reading – Dividends can get cut edition
Yup, I think the title says it all!
More on that in a bit for this week’s theme – welcome to a new Weekend Reading edition.
In case you missed some recent articles:
I updated some of our income needs and wants in semi-retirement here, including what our basic budget might be.
This is a good new year’s financial checklist to consider, including some very important numbers related to the RRSP contribution limit, CPP contributions and details about the First Home Savings Account (FHSA).
Weekend Reading – Dividends can get cut edition
Yes, looking at you: Algonquin Power (AQN).
A dividend fan to many Canadian shareholders (until this week at least…), AQN slashed its quarterly dividend by about 40% in a much-anticipated move – to fight their challenging debt and higher interest rate headwinds.
A good reminder at the personal finance level too, lots of debt with higher borrowing costs can be detrimental to your financial well-being.
At the time of this post, the stock price is now under $9 from much higher heights.
Way back when, when I started buying most of my AQN, it was under $7 per share but sadly that was almost a decade ago.
With the news this week, Arun Banskota, Algonquin’s chief executive officer, called the dividend cut absolutely necessary (and I would agree) to battle current economic conditions that have driven up interest rates to multiyear highs as central banks (and companies that take on too much debt) confront rising inflation. He mentioned:
“We have reached an inflection point, and as the market continues to evolve we are facing various challenges that are putting pressure on our growth rates and making our dividend payout unsustainable,” Mr. Banskota said during a call with analysts.
“As a result, we are taking decisive actions to address these challenges and strengthen our financial position,” he added.
They needed to.
Over the years, I’ve added a bit more AQN to my portfolio. I actually got a small bit more in 2022 beyond other purchases.
That was a mistake of course, knowing what we all know now.
So, what will I do? Buy? Sell? Hold?
Well, I dumped my small portion of AQN inside the TFSA after the dividend news broke but I kept some remaining AQN inside my taxable account (where I started buying and holding most of the shares years ago, and recent additions) to potentially offset future capital gains.
I may sell some AQN there over time too, who knows, but I think it makes sense for me to realize any small capital losses to offset my capital gains (when incurred) when not working full-time.
Generally, if you had an allowable capital loss in a year, you have to apply it against your taxable capital gain for that year. If you still have a loss, it becomes part of the computation of your net capital loss for the year. You can use a net capital loss to reduce your taxable capital gain in any of the 3 preceding years or in any future year.
Incurring capital gains makes sense when I’m not working full-time and only part-time when my income is a bit lower to reduce taxation.
Your mileage may vary.
A while back, during peak pandemic, the guys at Stocktrades and I discussed when to sell a stock after a dividend cut. It’s not an easy decision and depending on why you wanted to buy any stock in the first place, the decision is not just this or that so quickly:
As a DIY investor, who decides to buy and hold some individual stocks for growing dividend income, depending on the assets you decide to hold some dividend cuts can and do happen. I’ve had a few over my DIY investing career and potentially I’ll have more. Who knows. The financial future is always a cloudy place.
That said, this is why I do own a basket of stocks along with some low-cost ETFs (for extra diversification) and likely always will as part of my hybrid investing approach.
I don’t mind being transparent (as much as I can) on this site since I use this blog, my successes and my failures, as teachable moments for myself and hopefully these posts help you as well. I’ve never been a perfect investor.
I simply try to save and invest in a manner that meets my own goals over time while using a methodology I can stick to over time as well – that is largely owning dividend paying companies to help deliver rising dividend and distribution income:
See my latest dividend income update here that was at an all-time high recently. I will share what 2023 brings!
What I have coined my hybrid approach to investing has worked very well for us overall for the last 15 years and I anticipate it will continue to do so over time.
Even if remaining AQN shares dropped to absolute zero in my portfolio, tomorrow, I would still be Beating the TSX (BTSX).
Despite this dividend cut, I aniticpate BTSX stocks will continue to power investors like myself who use this approach going-forward. Owning a collection of stocks that compromise the top-portion of low-cost ETF XIU stocks works because:
You tend to own mostly large stable companies
- The TSX 60 (via XIU) is an index composed of the largest companies in Canada.
- Most offer what Warren Buffet would call a “wide economic moat”.
You tend to buy these stocks at good valuations
- Owning the companies by higher yield, by design, means more favourable valuations. Because yield is calculated as the dividend/stock price, as the stock price declines, yield increases. So, higher yield can be an indicator of more buying.
You tend to own companies with a good history of dividend raises
- Evidence continues to suggest here at home that dividend paying companies, as a collective, offer outstanding returns over time. I’ve been the beneficiary of that.
Weekend Reading – Dividends can get cut edition summary
Look, I didn’t like the dividend cut and I would have liked to avoid it. Hindsight is 20-20.
For now, I will continue to own a very, very small portion of AQN relative to my overall portfolio value only in my taxable account.
On the positive side, I maxed out my TFSA for 2023 along with my wife’s account for this year as well. We made some purchases and I will share those in the coming weeks.
I also have a few stocks on my buy list for 2023 and I can share those too.
Finally, I recently hosted a live Q&A event with TD Bank I encourage you to check out.
We didn’t talk about this dividend cut, it’s largely meaningless to my overall plan anyhow and I have the numbers to prove it (!) and instead we focused on the bigger picture…
My event will also be posted on TD WebBroker’s Learning Centre and TD’s YouTube page shortly if you want to check it out there.
Stocks go and up and down, and sometimes down more than I would like! That said, I’ve been very pleased with our portfolio over the years and I suspect that will continue if I stick to my broader plan.
Passive dividend and distribution income remains on FIRE in my opinion to help fuel some semi-retirement dreams in the coming years. On that note, I look forward to continuing to share that journey right here: the good, the not-so-good, and the in between.
More Weekend Reading…
On the positive side, I have some defensive stocks that are WAY up in value over the years. I’ve been buying those companies since I’ve been a bit concerned about any pending recession. This is how I was positioning my portfolio for that: how are you going to navigate a recession?
Ben Carlson from A Wealth of Common Sense offered up this, this week: what if we don’t get a recession this year?
What’s ahead for housing in 2023?? Have a look!
A BlackRock strategist is predicting the TSX should still move higher this year, amidst higher interest rates and inflation. From the article (paywall):
“In both Canada and the U.S., earnings expectations are still mid-single digit positive for 2023. Single digit earnings growth next year would be a huge victory for corporate America in an environment where the economy is experiencing a recession in the first half of the year.
Energy and financials are two sectors that we like and where earnings are already conservative. This well positions the Canadian stock market to have another year of outperformance because the earnings downside is more limited. When I think about the U.S., I would assume that this mid-single digits earnings growth would fall to flat or maybe mid-single digits negative next year.
Markets haven’t yet priced in the damage to earnings and market sentiment is still not pro risk, that’s why we’re still relatively defensive heading into next year. Our portfolios are about as defensive as they’re going to get.”
And on what to own to succeed in 2023:
“Now we think that you need inflation protection in a portfolio because the recession foretold is not likely to bring inflation back to target. So we need to have assets like inflation-linked bonds, for example, and energy.”
On a related note, fixed income is coming back. You can get 5% returns via 1-year GICs at the time of this post!
Check out the Best GIC Rates in Canada right now linked here. Cashflow is always king but keeping cash handy is good too!
Have a great weekend and see you in the comments section – drop a question or comment over the weekend. I read everything I get 🙂