A Case Against High Dividend Yield Stocks

On July 30, 2014, in Blog, by The Dividend Guy

As you already know per my investing strategy, I’m not a big fan of high dividend yield stocks. At DSR, we even penalize stocks paying over 5% for our Rock Solid Ranking. After sending one of my newsletters, a reader answered me back telling me, once again, that I wasn’t picking stocks with high dividend yields. In other words; stocks I write about don’t generate enough payout to interest him.

As I’m a very curious investor and open to new ideas, I asked him to provide me with some of his latest good picks to see how his portfolio is going. When I send him this email, I also added to be very careful with high dividend yield stocks as they are riskier than regular stocks. After all, there is a reason why a company pays a 6%+ dividend distribution and it’s not because management is generous. Willy Wonka hasn’t taken over any company yet!

The reader kindly answered back with four selections:

Kinder Morgan Energy (NYSE: KMP) 6.66% dividend yield

BreitBurn Energy Parnters L.P. (NASDAW: BBEP) 8.81% dividend yield

Starwood Property Trust (NYSE:STWD) 8.10% dividend yield

Ares Capital Corporation (NASDAQ: ARCC) 8.91% dividend yield

For argument’s sake, I will pretend he owns only those four companies and invested $25,000 in each of them. I will do the same with four of my own selections and build a 100K portfolio with the same proportions. I will analyze each stock individually and compare both portfolios over a 1 year and 5 year periods. We will see how both portfolios go.

 

Please note the reader mentioned he never holds more than 5% of his portfolio in any of his stocks and that he follows his holdings carefully. I believe he is an experienced investor and knows what he is doing.

Portfolio #1 High Dividend Yield Approach

 

Portfolio #1 shows an average dividend yield of 8.12%, this is a very impressive payout distribution yield. Technically, 100K invested in this portfolio will then generate over $8,000 per year. From a retiree’s perspective, earning $8k per 100K invested is the jackpot. For someone with 500K invested in the market, he could technically live off his dividends and barely touch his capital. That’s the perfect scenario.

Now, let’s check what happened if you had put 100K 1 year ago in these four stocks:

Ticker
Price 07/23/2013
Nb. Shares
Price 07/23/2014
Dividend Paid
Total Profit/Loss
Return
KMP$85.78291$84.49$1,576.71$1,200.754.80%
BBEP$18.011388$22.85$2,956.69$9,675.1838.70%
STWD$25.86967$24.01$1,836.81$48.340.19%
ARCC$17.631418$17.06$1,758.37$950.093.80%
Total$11,874.3511.87%

As I mentioned, today’s portfolio dividend yield is slightly over 8%. It seems that over the past 12 months, three stocks show a negative value and compensated with a high distribution. The portfolio shows a total return of 11.87% including dividend. This is mainly thx to BreitBurn Energy Partners who show an amazing +38.70%. The other three stocks didn’t do much. In comparison, the S&P 500 went up by 17.33% not counting dividend during the same period. Still, it’s not a bad investment.

The results are far more surprising when you look at a five year period:

Ticker
Price 07/24/2009
Nb. Shares
Price 0/23/2014
Dividend Paid
Total Profit/Loss
Total Return
KMP$54.58458$84.49$10,924.33$24,624.4098.50%
BBEP$7.953145$22.85$24,402.52$71,257.86285.03%
STWD$19.671271$24.01$9,214.54$14,730.5558.92%
ARCC$8.482948$17.06$18,720.52$44,015.33176.06%
Total$154,628.15154.63%

The portfolio outperformed the S&P 500 with a return of 154.63%. Besides Starwood Property (+58%), the other three companies performed very well. I’ll give you a scoop right away; the high dividend yield portfolio even beat my “DSR four stocks portfolio”. Does it mean it’s a better of way of investing? I’ll let you continue your reading to see what these four companies are and which ones I picked to make a comparison.

 

Kinder Morgan Energy (NYSE: KMP)

 

Kinder Morgan Energy Partners, L.P. is a pipeline transportation and energy storage company in North America, which owns and manages a portfolio of energy transportation and storage assets. KMP owns interest in 80,000 miles of pipelines and 180 terminals. KMP is owned by  Kinder Morgan Inc.  (KMI). Kinder Morgan is the largest midstream and the fourth largest energy company (consider four companies combined) for a total value of 100 billion.

kmp01

Dividend Profile

KMP DIVIDEND PROFILE

The dividend payout has increased systematically since 2010 ensuring a stable yield between 6 and 7%. The quarterly distribution went from $1.05 in 2009 to $1.38. This stock would never appear on my radar as the payout ratio is way above my standards (currently sitting at 185%). However, with pipelines, it is more interesting to look at DCF (Distributable Cash Flow) than using the EPS to calculate the payout ratio. The problem with Earnings per share is that it’s an accounting number, meaning earnings can be drop by non-real financial factors such as amortization.

If you take into consideration the past four quarters, KMP shows a 100% DCF ratio, which means it is able to distribute its dividend from its cash flow without any problems. Over the past three years, management has exceeded its dividend target. Overall, KMP shows a strong dividend profile.

General Profile

 KMP GENERAL PROFILE

Despite its numerous acquisition and revenue increases, the company seems unable to generate additional cash flow (purple line). EPS are also a bit hectic but it lead to a great boost last year. The period from 2009 to 2014 is linked to a constantly improving economy which helps KMP as the need for both oil and natural increased. Main risks attached to such companies are the price of the resource along with future regulations. Pipelines and energy distribution is not my cup of tea but I can understand why an investor would find this stock attractive.

 

BreitBurn Energy Partners L.P. (NASDAW: BBEP)

BreitBurn Energy Partners LP is a Delaware limited partnership, engaged in the acquisition, exploitation and development of oil, NGL and gas properties in the United States. Their presence is well established in nine states:

BREITBURN 01

They focus greatly on distribution, which explains their very high dividend yield. BBEP recently made a major acquisition (buying rival QR Energy for 3 billion). It makes them long for oil and aims to continue its success in this segment of operation.

Dividend Profile

 BBEP DIVDIEND PROFILE

Here again, we can’t really look at MLP’s the same way we look at regular stocks. With a negative payout ratio, it’s useless to tell you that it wouldn’t fit in DSR screeners. BBEP plans on increasing its distribution through additional acquisitions. This seems a good strategy when debt is cheap and economy is on an uptrend. But when things turn sour, I’m not convinced it will be a good strategy.

General Profile

 BBEP GENERAL PROFILE

Again, we can see the limited free cash flow generated by the business which is standard for an MLP. Revenues are steadily improving as acquisitions come along the way. However, while the stock price took a big jump from 2009 to 2011, the stock hasn’t generated squat for the past three years besides its generous dividend.

 

Starwood Property Trust (NYSE:STWD)

Starwood Property Trust, Inc. creates, finances, manages and invests in commercial mortgage loans and other commercial real estate debt investments, commercial mortgage-backed securities, and other commercial real estate-related debt investments. Starwood is the leader in commercial REITs and operates mainly in USA:

STARTWOOD01

 

Dividend Profile

 STWD DIVIDEND PROFILE

As is the case with any REIT, you can’t judge the stock with the payout ratio. Metrics like LTV (loan to value ratio) are more important to determine if the company is in good shape. Starwood averaged a 66.4% LTV since 2011, meaning 33.6% is equity in their book.

General Profile

 STWD GENERAL PROFILE

As the market picks up, STWD follows accordingly with some great volatility. But for a dividend payout seeker, it doesn’t really matter, right? Revenues and earnings are going in the right direction and the company seems to be well managed. I would have liked to see a longer track record to compare this company for a period longer than 5 years, but that’s the stock I’ve been given to comment on.

 

Ares Capital Corporation (NASDAQ: ARCC)

Ares Capital Corporation is a closed-end, non-diversified management investment company that primarily invests in non-syndicated senior debt, mezzanine debt and non-control equities. They are present in many industries and aim mainly for first lien debts (source):

ARES CAPITAL 01

Dividend Profile

 ARCC DIVIDEND PROFILE

You look at the right graph; there was a dividend cut between 2009 and 2010. The quarterly payout went from $0.42/share to $0.35 and hasn’t come back yet. However, there are special $0.05 dividends paid along with a quarterly $0.38/share distribution. The payout has been stabilized around 85% after the dividend cut.

General Profile

 ARCC GENERAL PROFILE

It’s hard to understand something from a graph that goes up and down like this. It just seems the company goes from good year to bad year, this is enough for me to forget about it.

Portfolio #2 Dividend Stocks Rock Approach

 

Here’s our DSR portfolio with four stocks coming from our website. You’ll notice that I didn’ t take our best picks and even picked Chevron (CVX) which we recently sold. The purpose was to take honest stocks that would have been picked 5 years ago according to the Dividend Stock Rocks approach.

Johnson & Johnson (NYSE:JNJ) 2.73% dividend yield

Helmerich & Payne (NYSE:HP) 2.38% dividend yield

McDonald’s (NYSE:MCD) 3.37% dividend yield

Chevron (NYSE:CVX) 3.23% dividend yield

The portfolio dividend yield in this case is only 2.93%. This is quite a difference compared to the high yield portfolio. But is the high dividend payout enough to compensate the other companies’ growth? Description of each stock are little bit shorter than the high yield because you should know about them already. but first, here are the result after 1 year and 5 years…

100K invested 1 year ago:

Ticker
Price 07/23/2013
Nb. Shares
Price 07/23/2014
Dividend Paid
Total Profit/Loss
Total Return
JNJ$92.42271$102.49$724.95$3,448.9313.80%
HP$66.85374$115.41$845.18$19,005.2476.02%
MCD$96.76258$94.93$826.79$353.971.42%
CVX$127.26196$132.77$799.54$1,881.977.53%
Total$24,690.1124.69%

If I compare the high yield portfolio to the DSR portfolio over a 12 months period, the DSR portfolio easily win by more than doubling the high yield portfolio return. As it was the case with the high yield portfolio, I must admit the return has been generated by a single company: Helmerich & Payne. I didn’t want to take only surging stocks for my comparison, this is why stocks like MCD & CVX are part of my choices instead of AAPL for example .

100K invested 5 years ago:

Ticker
Price 07/24/2009
Nb. Shares
Price 07/23/2014
Dividend Paid
Total Profit/Loss
Total Return
JNJ$61.51406$102.49$4,930.09$21,585.9286.34%
HP$34.13732$115.41$2,505.13$62,042.19248.17%
MCD$56.08446$94.93$5,995.90$23,314.9193.26%
CVX$68.43365$132.77$6,126.70$29,632.47118.53%
Total$136,575.49136.58%

I was quite surprised to see that those four stocks didn’t beat the high yield portfolio over the past five years. The high yield portfolio generated almost 20% more than the DSR portfolio. While both portfolios beat the S&P500, the DSR portfolio is not that impressive. Further down is the review of the four DSR stocks along with my conclusion comparing both portfolios.

 

PSST! KEEP READING, I’VE FOUND A SHOCKING CONCLUSION….

Johnson & Johnson (NYSE: JNJ)

JNJ is up almost 12% this year and have nothing but good news for investors when posting its first quarterly results. Prescription drug increases, profit jumps and a 2014 outlook increase as well. JNJ published sales increase of 3.5% and a profit jump of 8%. Both results were beyond analysts’ expectations. JNJ sales were led by international sales (+10.8%). JNJ is also working on a new diabetes drug which could push the stock to higher levels. Then, during the second quarter, JNJ continued its great job and show strong drug pipeline. They can also always rely on their consumer products as a great base for cash flow.

Dividend Profile:

 JNJ DIVIDEND PROFILE

Hum… what can I say? Dividend payouts are up, payout ratio is going under 50% and the dividend remains close to 3%. Perfect dividend stock, period.

General Profile:

 JNJ GENERAL PROFILE

After settling their quality control problems in 2011-2012, JNJ came back stronger than ever with better than expected sales and profit. This is what shows in this graph.

 

Helmerich & Payne (NYSE:HP)

Not to be mistaken for the computer maker HP, Helmerich & Payne is evolving in the drilling of oil and gas wells. HP divides its business in three segments: U.S. Land, Offshore and International Land. The US land drilling is the most important part of their business with over 85% of their revenues. The urge for US energy independency has greatly helped HP over the past 5 years. The stock has surged by over 45% in 2013 and still trades at a low PE ratio. The most beautiful part of their business is probably that regardless if they find something or not down the well, they get paid! Their high level of technology is the key to remain competitive in their market.

Dividend Profile:

 HP DIVIDEND PROFILE

HP is the prototype of a company that was injected by a dose of adrenaline in the past two years. The stock soared along with dividend payouts. The payout ratio is still under control but the company can’t keep increasing the dividend as they did since early 2013.

General Profile:

HP GENERAL PROFILE

Equity has taken the entire place in this company and both earnings and revenues are on a very important uptrend. As long as the market remains bullish for oil, digging wells will be a good business.

 

McDonald’s (NYSE: MCD)

Ronald’s playground is not the happiest place to play these days. It’s been about 18 months now that McDonald’s has showed extreme difficulties in pushing their sales higher. YOY profits are down by 0.64%, $0.04 under estimates. Sales were up by 1.38%, but that’s not enough to convince investors MCD has the right marketing plan. Competition has been crazy lately (have you seen Chipotle Mexican Grill (CMG) results?) leading to high pressure on margins. The consumers shift to healthier food is not helping MCD in mature markets either. What’s the difference between a surge in sales of 17% for CMG and a stagnating +1% for MCD? You got it right: organic and healthier food. McDonald’s remains the leader in the fast food industry but changes in their menu urge.

Dividend Profile:

MCD DIVIDEND PROFILE

Despite not great financial results over the past 18 months, MCD has been an example in terms of dividend payer. The payout ratio is relatively stable while the dividend paid never ceases to increase.

General Profile:

MCD GENERAL PROFILE

You can see the slowdown since 2012 on this graph for both revenues and earnings. However, the cash flow generated by this company is fairly stable.

 

Chevron Corp (NYSE: CVX)

Chevron’s recent quarter wasn’t a fairy tale. Profit fell 27% as all core business segments struggled. 95% of CVX profits come from its Exploration and Production segment and this part of the business dipped 27% as well. The stock didn’t hit the bottom of the price graph because investors keep hoping major projects are about to go into production. The recent 7% dividend increase should be enough to keep us waiting a little bit longer.

Dividend Profile:

CVX DIVIDEND PROFILE

What will comfort many investors is the combination of a low payout ratio (under 30%) with a clearly increasing dividend. It is true that we have sold CVX in our portfolios not so long ago because we believe there was better opportunity, but I didn’t want to take only super winners to go against the high dividend yield portfolio. Since we are looking more at what happened in the past, I figure CVX was a great candidate to compare over the past five years.

General Profile:

CVX GENERAL PROFILE

 

Shocking Conclusion

 

So the High Yield Beats the DSR Model – Why is This Article Against High Yield Then?

 

A simple answer; look at the bigger picture. When I did a comparison between both portfolios, I took a 1 yr and 5 yr investing horizon. Considering the 5 year period is exactly the start of a great bull market, we didn’t complete a full economic circle. Check out the total return if we use the same stocks but since January 1st…2007! I didn’t even consider calculating the dividends since the capital growth is too important…. For the DSR portfolio!

 

High yield portfolio:

[table “27” not found /]

DSR Portfolio:

[table “28” not found /]

 

Well… 164% Vs 21%… Any Questions?

Now we see the real weakness of a high yield portfolio; it all goes well when the market is up… but it goes horribly wrong when the market goes down. While the first portfolio struggled big time and finish with a small 22% gain over seven years, the DSR portfolio surged by 164%. Don’t even think about the dividend, there is no comparison here.

Will this scenario happen in seven or ten years from now? I believe so. It’s easy to leverage on cheap money in a growing economy but it is harder to grow and increase payouts during tough years. Strong dividend growth stocks do it where high dividend yields fail lamentably. So if you think investing in high yield dividend stocks is a good thing, you must be looking at steady payouts. Don’t expect much of that if you intend to hold you stocks for more than ten years.

I think this also proves that you should always consider a full economic cycle to analyze an investing strategy, what do you think?

 

Disclaimer: I hold JNJ, HP and MCD in my portfolio. I sold CVX in July 2014.

 

 

30 Responses to A Case Against High Dividend Yield Stocks

  1. mark says:

    Great article. I haven’t looked but I was wondering what the beta was on the high yielder vs the dsr stocks?

    • The Dividend Guy says:

      Hello Mark,

      Very interesting questions, I’ve checked their beta on Google Finance, here are the results:
      KMP 0.49
      BBEP 0.33
      STWD 0.55
      ARCC 1.08
      Avg: 0.61

      JNJ 0.56
      HP 1.36
      MCD 0.28
      CVX 1.04
      Avg: 0.81

      technically, the high yield has a lower volatility than the DSR portfolio, but it’s hard to truly consider this metric with only 4 stocks in your portfolio (the difference between HP and MCD beta’s is a good example).

  2. There is a belief among some investors (including ME) that higher yield stocks tend to appreciate more. It is logical and your analysis supports this belief. Also, beliefs guide investor’s investing. There are some high yield stocks that are poor investments and these must be avoided, e.g., Seadrill in the long run. I would only buy two of the stocks that your reader suggested. I like Kinder Morgen and BBEP. I would suggest PSEC, VNR and BX. And soon is a good time to invest in them because they are lower in this market. I really appreciate your work. And this article, with your openness, is an example of your high quality.

    • The Dividend Guy says:

      Hello Jerry,

      It is true that high yield stocks may perform better during a bullish market, but I’ve observed they show great difficulty to come back after a market crash. I’ll definitely follow high yield stocks to see how they will react during the next market burst.

      Fortunately, I don’t believe it will happen this year!

  3. I also believe that while some have higher yield, dividend growth is not necessarily similar to other stocks in the 3% range and taxes are also treated differently in some cases. As a Canadian, KMP will withhold taxes in a RRSP account so you don’t even get the full yield anyways. For Americans, it is different but still something to look at.

    On the Canadian side, I like Enbridge Income Fund.

    • The Dividend Guy says:

      Hello Passive Income Earner,
      you bring a good point that tax treatment of your investment depending on the country and the type if account is very important.

      I didn’t factor taxes in my analysis because it depends who read this article (US vs Canadian). But in the end, the stock value growth potential isn’t there for high dividend yield stocks over a full economic cycle.

      Thx for passing by :-)

  4. Hemgi says:

    On average I got a better return for 2-5% dividend payout companies than for high dividend payout.

    However, I found interesting to buy dividend company the week they cut the dividend and the strategy has been successful for many stocks: CHR.B, EXE, PBI. This strategy is not for long term, because the dividend cut is normally a sign that something is going bad and it is important that the reduced dividend being well covered.

    • The Dividend Guy says:

      Hello Hemgi,
      that’s an interesting strategy, how long do you hold those stocks after their dividend cut? I would definitely sell any stocks that cut its distribution, never considered buying them right after the cut.

      I guess it also depends on the reason why the company cut the dividend!

      • Hemgi says:

        I keep them normally for a short period of time.

        EXE cut their dividend from 0.84$ to 0.48$ and share fall from 8.00 to 5.50. I purchase at 5.50$ and sold it two week after at 7.00$

        CHR.B was a little tricker because I already have position on the title (purchased at 2.75) when they cut the dividend by half resulting in a fall from 3.70$ to 2.00$. dividend ratio was very good at 2.00$ (15%) and was well covered so I purchased a lot of share at 2.00$. Some were sold at 2.40$ the week after, some at 3.50$ when they increased dividend to 0.45. Still have some shares with a stock at 4.40$

        Next in line is Just Energy. bad trimester, they cut dividend from 0.84$ to 0.50$ but dividend is covered at 80% and the yield is 15%. Just purchased some stock at 5.95$ and expect title to reach 7.00$ when people will realize that it is still a good investment.

        Why it is a good strategy? 1st, the value of the share before dividend cut reflect the risk associated with the payment of the dividend (higher the dividend higher the risk) so the dividend cut is not really a surprise. 2nd, market over react and people simply liquidated their stock pushing the stock at a higher payout rate than before the dividend cut.

        But, basic rule is that the dividend need to be covered. If the company cut dividend because they losing money every month, they simply cannot afford to pay a dividend and I will not touch that.

        • The Dividend Guy says:

          Thank you for adding more thoughts on your strategy. I agree with you; a high dividend yield comes with a stock price where risk has acknowledged. Therefore, after the dividend cut, there might be a buying opportunity.

          This is a very interesting way to look at dividend stocks, I might check it out in the future. thx!!

  5. Howard says:

    You use the current price(s) to make the case of the most profitable portfolio. Obviously the stocks must be sold in order to realize this profit. If done so, when do you buy back in to realize the dividends? I prefer to hold the high yield dividend socks as long as they do not cut the dividend. My strategy is to collect income to enhance my retirement and not to try to time the market as your strategy implies. You also belie the title of your blog which is alleged to be about dividends and not capital gains. Still, overall, an interesting viewpoint.

    • The Dividend Guy says:

      Hello Howard,
      My investing goal is to receive dividend payouts. However, my point is that if you invest for the long term, I rather have both: capital gains + dividend payout. Because in the end (e.g. at retirement), I will most likely use both my capital and dividend to enjoy life. It’s easier to do it when your capital has more than double in seven years; you don’t need to rely only on dividend payment as you have more room with capital gain on top of it.
      Thx for passing by!

  6. Steve says:

    Thanks for the great article. I am looking at dividend stocks as a way to replace the fixed income portion of my portfolio. So I am already exposed to market growth through other stock investments. It seems to me that if the lower dividend but higher growth stocks comprise all of your investments, it provides balance between income and growth. However, if an allocated approach is used where lower risk fixed income investments are balanced with growth stocks, the high dividend yield investments might fit well. The question really is one of assessing the risk of losing the capital invested in the high dividend companies. How would you look at the risk of loss of capital for the investments you analyzed for both approaches?

    • The Dividend Guy says:

      Hello Steve,
      This is a pretty good question; how to assess the risk of loss of capital on an investment. I’d say the risk is higher if your investment horizon is short. If you need to sell some of your stocks in three years, you may or may not be making money as even the best companies will drop upon a recession (creating buying opportunities).

      As the latest charts of the article show; high dividend yield stocks have a hard time to come back from a recession or a market crash. It’s only normal as the company is priced to reflect its risk. A “risky” company may do well in a bullish market supported by a growing economy. But when things turn sour, they are the first to drop and the latest to come back to their “original price”. This is why I see buying strong dividend growth stocks with minimal risk in term of losing money on my capital… as long as I can hold them for a long period of time!

      Cheers,

      • Steve says:

        Any comments on assessing the risk of capital loss for an MLP? Does the price of MLP’s tend to fluctuate less than a lower dividend stock? You made the case that they don’t increase in growth periods, but do they also maintain their value during a downturn? If so, I would say that the are less risky, and therefore worth considering as a replacement for bonds.

        • The Dividend Guy says:

          Hello Steve,
          I think MLP,s will deserve a whole chapter on this blog. I’ll definitely take a closer look at this type of investment (and I even might add a MLP dividend stock list to DSR!). Be patient, it will come!
          Cheers,
          Mike

  7. Craig says:

    Mike,
    Interesting article and comparisons! As you noted the comparisons depend upon when you invested in the stocks, what your objectives are and the tax treatment differs if you’re Canadian or US. I would agree that KMP and BBEP (pipeline infrastructure) are the better of the 4 high dividend stocks noted. Both are publicly traded master limited partnerships (MLP’s) with favorable US tax treatment and must pay out most of their earnings: thus payout ratio isn’t relevant. The DSR portfolio stocks are solid dividend stocks with a focus on long term dividend growth and reasonable capital appreciation. A wholly different investment strategy. JNJ & MCD are likely the best 2: HP and CVX are “energy investments”.

    Perhaps the DSR conclusion should acknowledge that at least 4 of the 6 stocks belong in a long term income investment portfolio. The stocks have sound fundamentals, consistent dividend payments, provide dividend growth, sound payout ratio’s (where applicable), are solid business and low risk income investments for the long term with very good Total Return prospects: (KMP, BBEP, JNJ, MCD, HP and maybe CVX). Personally, I hold 2 of these and sell Puts on 2 for income: my effective yield on KMP is almost 11%..

    Keep up the good work and consider the benefits of adding selective high dividend stocks to your portfolio’s.
    Craig

    • The Dividend Guy says:

      Hello Craig,

      The MLP tax structure is definitely an important factor when you analyze such company. Their payout ratio is not comparable to a regular stock. However, I was quite surprised to see how the high yield stocks didn’t perform when you consider a full economic cycle. In the end, when you buy a MLP or a high dividend yield stock, you should expect a dividend payment, but nothing else.

      This is why I prefer dividend growth stocks as when you combine both, your total returns is way higher.

  8. DivHut says:

    This is a classic question every dividend investor faces… go for current yield or high dividend growth. Personally, I built my portfolio around the latter. I never chase high current yield because I don’t want to constantly watch my investment and worry about dividend freezes or cuts because of a too high yield. I’d much rather own a low yield but high dividend grower like AFL over and ARCP. Thanks for sharing.

    • The Dividend Guy says:

      Hello DivHut,
      The other thing to consider is also that a stock showing a strong dividend growth is also showing a strong business model. You can’t really continue to increase your dividend if you can’t grow your business properly. This is why you reduce the level of risk over time.
      cheers,

  9. Mark says:

    Great article a lot of research, Not sure we would get the same results using Australian stocks as the high dividend yields are paid out by the banks who have dominated the returns in the market. Never the less may need to review my portfolio to make sure.

    • The Dividend Guy says:

      Hello Mark,
      yeah, there was several hours invested in this article :-)
      What is the range of dividend yield for an Australian bank? In Canada, banks are also fairly good dividend payer (they all pay around 4%) and they provide growth on top of it. Is there interesting opportunity in your country?

      • Mark says:

        Generally Australian Banks, the 4 majors at least are paying 5% + fully franked, ie with tax credits as well. Some do have some pretty good growth prospects or at least they seemed to have had in the past.

        • The Dividend Guy says:

          wow! 5% dividend yield + tax credit, that sounds pretty solid! I guess there are several investors going for Australian banks!
          Do they trade on other exchanges as ADRs on NYSE for example?

  10. Nicholas Dean says:

    Hi Mike,

    I wanted to thank you for this great well put together comparison article and you did a lot of work and the presentation is very useful and clear.

    This is exactly the kind of stuff I love to see and read about. 

    Keep them coming,

    Cheers for the great information.

    Nick

    • The Dividend Guy says:

      Hello Nick,
      I’m glad you like DSR along with those free blogs. I’m working on another big article to be published in the next few weeks!
      Cheers,
      Mike

  11. Valerie says:

    I really enjoy your emails. This was very interesting. I only hold Canadian stocks in my portfolio. I realize this is not always good investing but I prefer them. I generally do not buy a stock unless it pays 3% or higher although I do not hold really high payers either. I like TD, the Keg, BCE, T, BNS although I also hold Keyera and Peyto and they have done extremely well. I am a buy and hold type! Thanks.

    • The Dividend Guy says:

      Thank you Valerie,
      I like TD, T and BNS as well. Not a big fan of BCE (as compared to T) but it is still a very good company. As for The Keg, I didn’t take a look at it, can’t say.

      You should consider adding a few US stocks in your RRSP portfolio, this will definitely improve your diversification and lower your volatility :-)

      Send me an email if you have any questions!

  12. Hemgi says:

    I just check my portfolio (50 companies) and carefully look at return on investment considering the dividend yield and the dividend coverage.

    First observation: there is a direct relation between yield and dividend coverage.

    Yield = -0.025 x Dividend Coverage + 0.089

    Considering that there is a relation between Yield and Dividend coverage, I classified the stock in three categories: Dividend coverage is less than 1, coverage between 1 and 1.49 and higher than 1.49.

    Average dividend for the first group is 7.9%
    Average dividend for the second group is 6.2%
    Average dividend for the third group is 3.3%

    Average gain (excluding dividend) for a period of 18 months:

    Group 1: – 5.0%
    Group 2: +10.4%
    Group 3: + 24.3%

    So, based on that, I will slowly decrease my portion of my portfolio in group 1 and move them in shares meeting group 3 criteria.

    • The Dividend Guy says:

      Hello Hemgi,
      I think it’s a smart move; the economy may roll for a few more years (and help high dividend yield stocks) but eventually, the market will slowdown and stronger companies will generate better returns. It’s all about a sound business model and a healthy balance sheet! The MLP structure is a good way to generate stable income but the capital growth is limited over a long period of time.

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