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…
How I plan to optimize my portfolio drawdown in semi-retirement
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 🙂
I always find the topic of maximum position percentage to be a very interesting one. Add in sector and geographical diversification and it gets even more interesting.
Over time, I have moved away from doing anything about all 3. As I’ve mentioned, my wife and I hold 16 TSX listed dividend/income stocks and 1 ETF (ZWB) limited to 5 sectors – banks, utilities, midstream, telcos, and REITs. The current maximum percentage of total portfolio is 8.1% and 5 others are above 7%.
I think holding a bunch of different stocks just waters down a portfolio. Basically, I believe in “conviction” investing. If you like a company, buy more of it.
With this approach, you may get a couple duds but if done reasonably well, you should have way more successes. As an example, since 2013, my wife & I have sold 7 stocks for a total loss $121.3k. Of this, $91.3k was O&G producers – which along with divy cuts is why I’d never own O&G producers again. This was just part of the learning curve and tuning of our investment strategy.
On the other hand, our 12 largest complete stock sells have generated a total profit of $943.9K. 6 of these were take-overs and 6 were complete sells for various reasons – yield going below 3%, realizing pure renewables are totally flawed, not liking Brookfield any more with all their financial engineering, and no longer fitting into current investment strategy.
Yes, Brookfield does scare a few investors but it’s hard to ignore how much assets they own around the world. Approaching $1T.
Yes, your ZWB (Covered Call ETF) makes sense as a hedge but would you ever consider just living with the upside with stocks or ETFs? You already own all the big banks, right?
I find covered calls are good in neutral or slightly bearish markets.
Totally get owning banks, utilities, midstream, telcos, and REITs for your conviction investing. If you follow Stephen Jarislowsky’s long-term take on dividend payers in Canada, there are only about 30-50 stocks worth owning at all…
Wow: “On the other hand, our 12 largest complete stock sells have generated a total profit of $943.9K.”
Incredible stuff Don, everything has clearly worked out great for you!!
I’ll continue to own some O&G stuff: CNQ, SU, WCP with some pipelines. I’ll keep ya posted.
Very strange, as someone who got more interested/involved in self directing my investments around 2007, one of the first things i remember reading was to to limit all your individual positions to a maximum of 3%, even if it feels like you shouldn’t. So having 33 stocks was this magic number to achieve. However some said 33 was too many to manage and research/review, so a bit of a toss up here on what was actually the right course to take.
Originally purchasing about 30 individual stocks has helped me reduce some losses and dividend cut’s with early purchases i made, like Reitman’s, Penn West (Obsidian now), Dream office, AT+T, Chorus Aviation etc… (was actually never a fan of AQN)
With me going more of an income ETF route and cutting back on some sideways individual stocks with decent dividends, stocks like the ones i mentioned became even less than 2% of my overall portfolio so a cut or even a complete loss virtually has almost no effect on my monthly income.
That’s a good thesis, re: not much more than 3% or so assuming you want/desire to own 33 stocks.
I prefer my 5% rule since I have some conviction in a few stocks such as RY, TD, Telus, Fortis, BCE – I don’t mind any of them approaching 5% of the total portfolio value…
Nice avoidance of AQN 🙂
Are you mostly ETFs now, Paul?
Yes, I have crossed over to have more ETF’s than individual stocks and rarely do i even research a single stock now. For Bank exposure, I just purchase more HCAL for example. I do have a decent amount of Emera and BCE, and Enbridge and they are also part of the makeup of some of the ETF’s I hold. So well covered.
I may have mentioned before on one of your previous posts, that I do also purchase the all in one covered call ETF’s as well, but stay away from the super high yielding ones. I’m ok in sacrificing the potential but always “unrealized” total returns number, for a more simple stable monthly income that requires little thought, maintenance or a large cash wedge to supplement a bad downturn. Since I’m not requiring the income now still working, and just dripping everything in this downturn, it’s really fun to watch month to month how the monthly income just growing… Kind of like when i first started investing with the TD + BMO monthly income mutual funds as one of my first purchases 🙂 except with a little more exciting numbers.
I don’t mind HCAL at all, I just prefer owning all the banks outright for no fee. Incredible yield from HCAL though, what, north of 7%??
If you’re DRIPping that, your monthly income is likely to snowball.
I hope to release my next monthly dividend income update in a few weeks. Exciting, since I’m changing the report a bit after many, many years. I look forward to your comments Paul.
Ooops make that 16.010 shares. Just noticed my typo/
It sure looks like AQN was a popular stock to hold with your readers. Add me and my wife to the list. It looks like we might be holding a bit more than most readers. All tolled, we had 14,430 shares across our accounts. I just added another 1580 at $9.55 on Thurs so we have 16,020. The 40% divy cut does smart a tad but such is life.
I think AQN will eventually be fine as they have too many great assets and not even a really bad CEO and BOD can totally buggr that up. It is just going to be a slow process. Of course, there is a chance that it can sped up with the possibility of walking away from the KPC deal on April 26th if they don’t get the FERC approval. There also is a chance that the CEO and most of the Board get punted. The last possibility is a take-over (by someone like Brookfield). Anyway, at this point I think AQN had a good risk/reward situation.
It’s sort of “funny” that after getting burnt by ALA, I posted the following comment on another board back in Oct 26,2021 after the original take-over announcement. I should have listened to myself but somehow got lulled into believing what management was saying about being able to handle their debt.
Total bummer!! I had really hoped they wouldn’t go ahead with this. What a mess and what a totally stupid thing to do.
AQN had been one of my all time favs having first bought at $5.55 in Nov, 2011. It no longer is and after it bounces back a bit after tomorrow’s massacre, I’ll be trimming it from a full position to a mid-position. This is quite significant for us as we currently only have 16 full positions and 3 mids.
I saw someone say that this seems a lot like ALA buying WGL which was the all time stupid take-over. I think it’s a tad different because WGL was about the size of ALA so that was like swallowing a whale. This is not quite that but is still really bad and I sure am disappointed.
The two take-overs do have another thing in common in that both WGL and Kentucky Power are cr*ppy companies.
Anyway, these things happen especially with companies that grow by acquisition. This is the last one that we won that falls into that group.. They rest are “steady-eddys”
Yes, lots of DIY / dividend investors owned AQN! Myself included.
I’m going to keep mine in the taxable account.
So, you still own ~ 16,010 AQN shares? That’s quite a bit!!
I’m sure it will come back a bit, Don, I mean, it’s not like the company is going under anytime soon with all their regulated assets.
“It is just going to be a slow process.”
Yes, indeed. 🙂
I think there could be a takeover at some point.
ALA, IPL, and a few others have burned some DIY investors over the years. It happens. Dividend cuts can and do happen, part of the challenge navigating that sometimes, hopefully rare, as a DIY stock investor.
It’s not going to change how I invest!
Don, I assume you continue to hold the same stocks still otherwise? 16 + 3 other stocks = 19 stocks in total?
I recall you hold a lot of what I do:
Utils = CPX, EMA, FTS, AQN and then Banks = RY, TD, BNS, BMO, ZWB.
I think you and I own all the same pipelines too like TRP, ENB and PPL – don’t we all in Canada? 🙂
Telcos – BCE, T (the usuals!!)
I don’t recall the other ones off the top!
Did you buy anything in your TFSA yet for 2023 or just living the life and enjoying your growing divdiend pile?? Ha.
Yup, 16.010 shares of AQN and not worried at all. As I mentioned, they have too many great assets and like you mentioned, they have lots of regulated assets (80%, I think it is). It’s also interesting that with a $8.90 share price, we are still up $30.5k (with all the past divys).
It’s also interesting that we did get burnt on ALA and IPL but still made a profit of $7.8k for ALA and $55k for IPL (thanks Brookfield 🙂 ), I always say that ALA is the most disappointing stock we’ve ever owned (we’ve lost dough on a total of 7 companies but that was more my fault so not as disappointed). The ALA management ruined a great Canadian company and blind-sided/strung their investors along the way.
Good stuff on knowing my wife & my list of holdings. Only additional ones are full position of KEY and a now half position of DIR.UN and NWH.UN, I’ve soured a little on the REITs (no divy growth and even potential for cuts) so have been trimming our last two REITs to a half position. I also trimmed ZWB to a half position. As time goes on, our portfolio is looking more and more like Henry Mah’s as he doesn’t like ETFs nor REITs.
We’ve actually been really active so far this year and in addition to adding to our TFSAs, we’ve used the REIT and ZWB trims dough to buy a bit of all our other holdings (between $5 and $20k of each)..
For the next 4-5 years, I still plan on continuing to buy more of our existing holdings in our RSP/RIF and TFAs as each account accumulates $5k of extra divy cash. We use all the extra divy cash in our non-reg accounts for expenses, the grandkids account, and early inheritance.
Obviously, all is more than fantastic on the investing front for us. 🙂
That’s a heckuva profit 🙂
Yes, lots of regulated assets – not worried about it much longer-term but painful near-term. Stings. That’s all!
Easy to recall, most DIY investors have the same! LOL. There are only so many dividend paying stocks to own in Canada, for growth and capital gains. It just is what it is….this is why BTSX stocks work IMO.
Right, REITs. I have CAR.UN as my main REIT and owned it since 2013; so about 10 years. A double for me. They should be able to increase their dividend/distribution by 5% later this year.
Yes, Henry is not a fan of REITs 🙂 I recall he’s down to about 12 stocks now! Not sure I could do that myself but obviously he has a lot of conviction in his holdings and kudos for his investing discipline since I’m sure his family and grandchildren are doing to benefit from his investment work – eventually.
Ya, I will share what I bought inside the TFSA soon. I hope to post some financial goals for 2023 later tonight.
Continued success to you, Don – you’re doing fantastic and remain an inspiration for me amongst other readers 🙂
History does not repeat itself but it rhymes Aqn collapsed in the last cycle tightening.
Companies that grow by acquisition aggressively and become the darlings of Bay St AQN CPG
become exposed when Central Banks take away the punch bowl.
Lesson Avoid leveraged hyped growth by acquisition companies. Stay with boring predictable proven uninspiring dividend growers
Your fist loss is your least loss.
Indeed, Bob. re: “Companies that grow by acquisition aggressively and become the darlings of Bay St AQN CPG”
Thankfully I only own a bit of AQN. Not too worried as it relates to my overall portfolio.
great article. From an old guy, dump any stock once the dividend gets cut. Some do recover but i can take many many years. And its only a small percentage that do fully recover and grow.
I enjoy your articles.
Thanks, Lester. Yes, some might recover but it takes time. I’ve had a few that have done this over the years. Hopefully less going forward 🙂
I appreciate your comment!
Really enjoyed your presentation on the TD Direct Investing website. Lots to think about when your are looking at retiring and how to fund it.
Yes, I own AQN also but not a large part of my portfolio and mainly in my registered accounts RRSP’s. I am not going to sell and hope for a buyout from another company in the same field.
Thanks very much, Roger – that was fun to do and the folks at TD were very keen on doing that with me too!
I think my plan is pretty good but I’m sure it will change (a bit) over time as I dive deeper into those income needs and wants.
I don’t see many folks selling AQN, for the most part, I will continue to hold mine in taxable account and you could be right on the buyout in a few years…
my shares of AQN are all unfortunately in my TFSA. A sizeable capital loss for me at this time. I may sell. Not sure if it worth keeping these shares. My faith in the long term prospects of this company are a bit rattled at the moment. Book value down close to 50%. I can commiserate.
You’re not alone, Sue….many DIY investors own this one and have done so for many years. I will hold what I have in my taxable for a bit but on the positive side, near-term while painful it should come back a bit over time. Might take a few years though to get their debt under control. Hopefully not a massive position/holding for you? I always try and keep any one stock <5% of my total portfolio value for these reasons. You never know!
Hope all is well,
Thanks Mark. In the bigger scheme of things regarding my overall portfolio, no its not a massive position, just a bigger position because its concentrated all in my TFSA. I am comfortable with capitol loss situations in general, as I have a lot in the non registered side of the leger to carry forward but its painful for a TFSA since one can’t claim the capitol losses. Having said that…..its only a realized loss if I sell right. I tend to take the long term view so I may keep my shares and just focus on adding to my other TFSA holdings or buy something else from the BTSX I don’t have or a dividend grower and see how it goes. Thankfully this stock was not in other registered accounts. If it were in my non registered account than yes, perhaps it would be a no brainer and I would sell. Time to make some lemon aid out of this situation. I got burned with Nortel back in the day and am trying to figure this one out as to what to do but at the same time I don’t want that history to repeat itself for me.
As long as any one stock is <5% or so….amongst a portfolio (my personal rule only) then really little to worry about. They have on gone under; not “Nortel effect” here just an unfortunate dividend cut due to bad near-term management decisions. It happens.
There are no capital losses per se or capital gains inside the TFSA – it’s just values that go up and down since all assets held, all income gains, are tax-free so correct: “for a TFSA since one can’t claim the capitol losses” and yes, you would be down for sure if you sold/sell!
Nortel hurt a lot of folks – some more than others – those were some wild days with that one! I was in mutual funds back then but it was ugly all around!
thankfully its less than 5%
thank you for your perspective for us all here 🙂
Ha. All good. Again, the ups and downs owning individual stocks. I will keep some shares in my taxable for now!
I have a very heavy position on AQN. And lots of them I bought above $20. Not only I lost dividends income, a heavy tax loss too.
Well, lesson learned. Past performance != future.
You’re not alone, May. Very disappointing with AQN as are thousands of DIY investors who own it. It should come back in time but very annoying, I feel that too.
Thank you Mark for this post.
AQN has been the center of talks everywhere and on every blog :). I hold it and so does my wife but hey we can’t be right all the time and that’s the risks that we take when we invest , I’ve decided to hold what we have for now ( 2000 shares between both of us ) and yes with a big loss in capital 42% because we started buying 2 years ago but it represent 2.2% of my portfolio so with a current 6% yield it’s not a bad deal and hopefully share price will recover a bit and if not life goes on. In the new year I’ve added to my RY and SLF in my TFSA and BIP for my wife’s TFSA and here I’m looking forward to watch your TD interview and to for you to share with us your 2023 TFSA buys .
Have a great weekend Mark
AQN has been the center of talks everywhere and on every blog :).
Ha, yes, it has. It’s been a big since many institutional and index funds own it as well.
I think holding for now is also fine and good. Having it only represent 2.2% of your portfolio is smart, a small annoyance really. It should recover in time and life will go on anyhow 🙂
I own a bunch of RY and some SLF as well. Let me know your thoughts on the TD interview!
Have a great weekend back, Gus!
this might sound silly but I can’t find it 🙂 I went into Webinar and all I found is the one you did on the 29th of July2022 .
Try here Gus?
Thank you Mark,
The link worked and I loved the interview , hearing about the three bucket system and asset decumulation was really interesting I know I’ve read it on the site many times but I felt like I’ve absorbed more on youtube 🙂
all in all Thank you so much for your time Mark you sure helped me a lot and many others.
This feedback makes my day – Gus! Thanks very much 🙂
Buying anything inside the TFSA for 2023? I will share some of my “boring” picks on the site soon!
Yes, I figured my slightly deviated bucket strategy vs. the tradition one should work in semi-retirement. I really don’t want to go any less than 1-years’ worth in cash for sure. I might even up that over time to 2-years’ prior to full retirement, which could be in another decade.
I’ve seen/heard/talked to many retirees who keep at least 1-2 years in cash/GICs beyond their predominantly equity investments and they sleep VERY well at night with this model. Although I’ve always been planning for this, myself, it’s good to know that others have employed a similar bucket approach as well.
I’ve always believed any assets you do not intend to sell, intend to keep >5-10 years should be in stocks and/or low-cost ETFs so I’m trying to eat my own cooking!
Let me know if you have additional questions and I can surely take some time to write about it over time!
Thank you Mark ,
one question comes to mind is for an investor like me who’s investment is 100% in Canada do you think that sticking to a “TULFR” R for reit I guess 🙂 is sufficient ? because looking at the TSX60 and most of those companies fall into those categories and if not what do you think an important sector in Canada that I’m missing.
I’ve added to my RY and SLF in my TFSA funny that I hold all six banks but RY was the smallest and in my Wife’s TFSA added BIP.
I like those top-TSX 60 stocks but I’m biased because I’ve invested that way for many years. I figure if the top-stocks in Canada aren’t making money, the top-20 or so, then we have bigger issues!
I think Canada is largely void in technology, healthcare and consumer sectors. So, I invest in the U.S. for those directly. I own stocks and ETFs like QQQ (for my tech), healthcare includes JNJ, and consumer stocks include PG for me.
I like BIPC and BEPC as well and own a bunch since they are invested in renewables and infrastructure stuff all over the place!
If misery loves company, I’ll just include AQN to the list of my other investing failures (Arctic Glacier, Lakeview Debentures and Crocus are my whoppers). Having said that, no point in selling the stuff now, the major damage has been inflicted. I’m even going to leave the synthetic DRIP in the TFSA continue for no particular (rational) reason. The dividend in the RRIF was just going to TDB8150 anyways so there will just be less of it.
Thankfully, I have some GIC renewals (1.4% & 2.1% both up to 4.9% ish) that will make the loss of the AQN income somewhat opaque in the “total income” box on the spreadsheet. Probably just whistling past the graveyard though.
Lloyd, I know dozens of folks that own AQN. I’m sure if we could have all predicted a dividend cut 5-10 years ago, at least when I got into AQN some 10 years ago, I/we would have sold at the “top” too!
The reality is, it can and should come back a bit over time. They run billions in a regulated business.
GICs are smart now for holding some near-term savings. My goodness. It if gets to 6%+ I will consider some myself!!
Have a great weekend,