Dividend Reinvestment Plans Are Not For Me

Every November when it comes time to renew the domain name for this blog, I promise myself that I'll write more in the new year. My best intentions usually lose steam in late January or early February. In order to recreate the spark, here is the second of what could best be described as 15 30-minute, quantity over quality, blog entries. 

     Many dividend growth investors choose to use dividend reinvestment plans (“DRIPs”) to add shares to their positions instead of receiving their dividends in cash. With some DRIP programs offering shares at a discount to the current share price, and given the long-term objective to grow large positions in certain companies, it can make sense to leverage these plans. However, I’ve made a choice never to use DRIPs in order to avoid complexity and maximize financial flexibility.

     Having complained about my discount brokerage many times over the years (never create an account with Scotia iTrade), and looking to keep my interactions with them at a bare minimum, not using DRIPs makes sense for me. Having to register shares for a company’s DRIP program, or even using a synthetic DRIP provided through iTrade, I’m happy to use the month or two it usually takes my brokerage to respond to requests in more productive ways. Plus, any DRIPs I started for positions in my unregistered account would entail me keeping track of the adjusted cost base of shares, given I have no faith in iTrade’s calculations based on past negative experiences. As I’ve gotten older, and had kids, I’ve learned that sometimes avoiding complex situations is important to maintaining my sanity.

     In my opinion, the best thing about being a dividend growth investor is the growing cashflows that appear in your investment account each month. Given my preference to make one or two purchases a month, I choose to retain control over my investment process and decide which companies are the best use of cash each month. Investors act as the Chief Investment Officer of their respective portfolios, and their most essential duty is deciding how to best allocate capital. When a share price shoots up prior to a dividend payment, adding more to a potentially inflated position wouldn’t leave me with a good feeling; nor would adding to a position that was on a losing streak. Receiving cash each month provides me with optionality in how I choose to allocate it in congruence with my current goals and the realities of the financial markets.

     Although avoiding complexity and maximizing financial flexibility are good enough reasons for me not to use DRIPs, I can see how they might be great for younger investors, with different goals, and better brokerages to pursue those plans. There might come a time when I rethink participating in DRIPs, but for now, I’ll keep receiving my dividends and distributions in cash. 

My Dividend Growth Investing Origin Story

Every November when it comes time to renew the domain name for this blog, I promise myself that I'll write more in the new year. My best intentions usually lose steam in late January or early February. In order to recreate the spark, here is the first of what could best be described as 15-minute, quality over quantity, blog entries. 

Since I love hearing about how people decided to adopt a certain approach to investing, I wanted to share my “origin story”.
Like most 20-somethings, I started to make lots of mistakes after I opened my self-directed brokerage account. A couple of my first purchases of shares were in companies that ended up going to $0 (Nortel and 360 networks). I also bought shares in a China ETF that ended up losing ~80% of its value, and a Canadian technology ETF whose performance was only slightly better than that of Nortel. On the other hand, the shares I bought in the Bank of Montreal and RioCan REIT, climbed steadily, and also distributed cash regularly.
Collecting dividends and distributions felt great given I was working in a series of entry level accounting and finance jobs that are notoriously difficult. Realizing that by investing some of my salary from these tough jobs, I could built a side income that could be leveraged to perhaps work less in the future, or at least pick a more enjoyable, if slightly less well paying job, held strong appeal to me.
For context, during this period in the early 2000s, a number of large corporate fraud cases were being discovered, leading to the downfall of such companies as Worldcom, Tyco and Enron. Hearing about these frauds caused me to distrust corporate executives, which coincided well with the idea of looking for companies who decided to return funds to shareholders, instead of retaining them to build their personal vanity projects.
Although the transition from a growth oriented, story-focused form of stock picking to dividend growth took almost ten years, I’m still proud of making that change. Looking back, I see lots of mistakes I made chasing yield, being seduced by management guidance, and concentrating my holdings in obscure, semi-illiquid shares, but those are the type of mistakes that pay figurative dividends now that I can hopefully avoid them, or at least minimize them.

Goals, Algonquin, Watchlist & Canadian Compounders

My apologies for the jumbled format below, but in an effort to write at least one monthly entry, I’m choosing good-enough over perfection. 

Goals:

At the start of 2022, I set a goal to increase my forward dividend income by $4,600, while targeting
a dollar- weighted organic dividend growth rate of 5.0%. I’m proud to report that I overshot my goal, 

raising my forward dividend income by $5,300+, while achieving a 5.3% organic dividend growth rate.

 

I’m taking my foot off the gas a little in 2023, aiming to add $3,200 (now, a bit more than that
after Algonquin Power & Utilities cut their dividend in January 2023), to bring my expected total
dividend income to a milestone amount. I’d also like my dollar-weighted organic dividend growth
rate to exceed 5.0% again this year. If I can accomplish the $3,200 goal, I’d then focus on building
the compounding portion of my portfolio, and adding a broad ETF to my unregistered account.
For tax reasons, it no longer makes sense for me to grow forward dividend income so
aggressively while I’m still working.

 

Other Objective for 2023:

After reading Bill Perkins’ ‘Die With Zero’ last year, listening to some episodes of Ramit
Sethi’s ‘I Will Teach You to Be Rich’ podcast, and then consuming Morgan Housel’s ‘The
Art of Spending Money’ last week, I’ve been focusing on ways to convert money into
memories. I have difficulty spending money, often falling into analysis-paralysis, which
subsequently impacts my level of happiness. Choosing to spend on things my kids
might remember as they get older is a priority in 2023. A couple of quick examples
this month have been tickets for my son to see his first professional hockey game,
a Gatineau+ pass that has allowed me to bring my kids to an indoor skating rink over 

the holidays, and even grabbing lunch at a restaurant after spending the morning at
the Ottawa central experimental farm. Lastly, since the objective is about more than
making memories for my kids, I brought home some flowers for my wife, and after
using my pair of 30+ year old second-hand, cross-country skiis for the past three
years, I invested in a pair of brand new skis, that I’m planning to explore trails with
this year. Hoping that I can get better at converting money to memories over the
course of this year.

 

Algonquin Dividend Cut:

As mentioned above, and outlined on my ‘Investment Holdings’ tab, I have a position in Algonquin
Power & Utilities (TSX: AQN). With the 40% dividend cut, planned $1B of asset sales, and continued
pursuit of Kentucky Power, I’m not sure what my plans are with respect to the holding. My faith in
their management team is low, releasing another negative earnings estimate sure hasn’t helped, as
has the decision to continue to seek regulatory approval for their Kentucky Power acquisition.
Although, the latter simply might be mouth-service to avoid paying a walk-away fee if the
transaction doesn’t close by April (when they can walk away for a much lower payment).I’m
taking a wait and see approach in the short-term.

 

January 2023 Watchlist:

Texas Instruments Incorporated (NYSE: TXN) – Reading about how management has aggressively
retired shares, focused on operating profit and FCF generation, and thinks so thoroughly about
capital allocation has made me consider initiating a position in this stock. Of course, since I started
to track it, the stock has risen over 5%.

 

Brookfield Infrastructure Partners (TSX: BIP.UN) – Of all the Brookfield units, I like BIP’s mix of assets,
geographical diversification, and results the best. Although this is already one of my larger portfolio
positions, I’m still very comfortable adding more to it inside my TFSA. As potential buys usually do,
BIP has steadily risen through January 2023.

 

A&W Revenue Royalties (TSX: AW.UN) – With this being the only Canadian stock left in my RRSP, my
thoughts areto add to my position in A&W in my TFSA, and then wait a month to sell my position in
my RRSP. This would free up funds to invest in a U.S. stock in my RRSP (possibly Texas Instruments).

 

Waste Connections Inc (TSX: WCN) – An environmental company I’m considering adding to the
“compounder” portion of my portfolio.

 

Canadian Compounders

One of my aims for this blog is to always provide readers with something helpful. If you’ve come this far,
I thought you might enjoy this tweet from @long_equity with a list of the Canadian companies with the
most linear share price growth over the last 10 years.

ReplyForward

7 Canadian Companies Providing Dividend Growth Guidance heading into 2023

In 2017, 2019, 2020, and 2021, I shared a list of Canadian companies that provide dividend growth guidance. I've decided to update this list as I find dividend growth guidance, specifically when it is expressed as a percentage, useful in helping me assess the capital allocation plans for companies, introducing a soft control by which to judge management's actions, and assisting me in projecting the organic dividend growth rate of my portfolio for 2023. 

The table below could be considered a starting point for further research. Please, let me know of any other Canadian companies that provide dividend growth guidance. I'll gladly update the table with your input. 

TC Energy Corp (TRP - 7.4%)	Dividend growth of 3-5%
Emera Inc (EMA - 3.9%)	Dividend growth of 4-5% per year through 2025
Telus Corp (T - 5.2%)	Dividend growth of 7-10% per year through 2025
Capital Power Corp (CPX 6.8%)	Dividend growth of 6% per year through 2025
Fortis Inc (FTS - 5.9%)	Dividend growth of 4% - 6% per year to 2027
Brookfield Renewable Partners (BEP.UN - 5.0%)	Annual distribution increases of 5-9%
Brookfield Infrastructure Partners (BIP.UN - 5.2%)	Annual distribution increases of 5-9%

In what was a tough year for the Canadian stock market, it is promising to note that none of the seven companies that provided dividend growth guidance in 2021 stopped doing so in 2022. I'm also cautiously optimistic that Brookfield's "BAM" units might start issuing distribution guidance sometime in 2023. Lastly, it's worth noting that perhaps Algonquin Power & Utilities Corp's move away from providing percentage based dividend growth guidance in 2021, could have been a red flag in retrospect. 

Here's wishing everyone a healthy and prosperous 2023!

The Bank of Nova Scotia - Thoughts

Although I try not to spend too much time hanging out on Twitter, @thedividendguy had an interesting question last week about why people buy the Bank of Nova Scotia ("BNS") over other Canadian banks. The question was worthwhile given BNS has underperformed its peers over the past five years, and is down about 20% over that period if you don't include dividends received. Reading through the answers of others, and then writing my own, made me wonder if BNS was worth owning at all. Without diving too deep into numbers, I thought it would be worthwhile to think about some of the top reasons BNS is worth investing in, and the key risks it currently faces.

Reasons
1. Total return potential: As of the time I'm writing this, BNS has a dividend yield just north of 6%, and it looks pretty safe given it only represents about 50% of net earnings. Not only is BNS priced relatively low compared to its Canadian banking peers (current P/E is ~8%), its multiple is below its own historical average of ~10% - 11%. Assuming BNS makes it through what feels to the inevitable recession in Canada, you'd be looking at a 9-10% return if the bank can get back to its own historical multiple. 

2. New CEO incoming: Although I don't profess to know very much about incoming CEO Scott Thomson, I wonder if Brian Porter "retiring" isn't a chance for the bank to move past some of their past missteps taken under Porter's leadership. It seems fair to say that Porter's bets in Latin America have at best underperformed, and the bank exiting all but four markets in the region (Peru, Chile, Mexico and Colombia) appears to be a first step in admitting a mistake. Call me crazy, but I think Mr. Thomson is more likely to consider exiting one or more of those remaining markets, and blaming the miscue on his predecessor. 

3. Canadian results remain strong: Although BNS reports on four segments, their Canadian banking segment results accounted for almost half their net profits through Q322, growing 23% year-over-year. As stated above, I do think Canada will inevitably go though a recession in the next year, but BNS has the capital base and experience to make it through to the other side. Between their expansive branch network, ability to cross-sell through various subsidiaries and platforms (Tangerine, Scotia Itrade, etc.), and their credit card business, it's hard to avoid dealing with the bank.

Risks
1. Reliance on Canada for profit generation: In fairness to BNS, I think this is a material risk for all Canadian banks, and Scotia might be the least exposed to the Canadian economy of any of the big six banks. That said, a long recession in Canada, a severe correction in home prices, or a series of large corporate defaults would greatly impact BNS's results.

2. New CEO could be ineffective: Based on a recent article in the Globe that explored how Mr. Thomson went from running the Board of Directors committee responsible for hiring a new CEO, to being named the new CEO of BNS, in a manner of months, I'm unsure if he represents an upgrade from Mr. Porter. Although he has some banking experience with Goldman Sachs in his distant past, it's rare for Canadian banks to hire relative outsiders as CEOs. Apparently, his former company also struggled with some issues in the South American countries it operated in. Lastly, as a Board member at BNS, I would think he would have shared any ideas to improve the bank's results with Mr. Porter, instead of saving them in case he eventually took over the bank.

3. Regulatory / ESG Risks: From December 2020, to November 2021, the Office of the Superintendent of Financial Institutions, that regulates banks in Canada, halted banks from increasing their dividends in order to conserve capital. After his Liberals won the last federal election, Prime Minister Justin Trudeau announced that banks (and insurance companies) would see a 3% increase in the tax rate they pay on their profits in excess of $1B. When considering how ESG concerns have made banks decrease financing of environmentally unfriendly industries is added to the two examples of regulatory risk outlined above, I become concerned that BNS will have a difficult time managing new rules/regulations/standards imposed on them. 

Although on balance I think the reasons one might invest in BNS slightly outweigh the apparent risks, the risk/reward relationship is far from optimal, with little margin of safety. For this reason, although I don't intend to sell my position at this time, I'm not confident enough to add to it either.