Chasing Dividends

Investors are challenged to find sufficient income as bond yields are historically low.  Many strategists are projecting an initial US interest rate hike this year which might lead to higher interest rates in the US.  In Canada it appears most analysts expect the Bank of Canada on hold well into 2016.  As a result, investors turn to dividends as they seek income.  However, not all dividends are safe!  Some companies pay out dividends that exceed their cash flow which can be a temporary or more permanent condition.  When you factor in virtually all businesses require some amount of reinvestment to maintain and/or grow their business it becomes clear that a dividend should be less than what total cash flow is minus maintenance capital and a bit of a cushion.  Financial Statements don't make this very easy to identify which requires deep analysis.  For example, consider the oil and gas company that in 2014 received $100/bbl for their oil and in 2015 received $45/bbl.  They might have had a hedging program to soften the decline in revenue but has it now expired?  One must determine is the cash flow from production at $40/bbl enough to fund any dividend without incurring significant amounts of debt?  What are your alternatives for income?  Give me a call and we can discuss some options that are appropriate for you. 

Shareholder Yield

Investors are constantly bombarded by a multitude of investment strategies and a combination of using each of them.  One strategy that has proven effective over time is that of Shareholder Yield.  It consists of 3 components: Dividend Yield, Share Buybacks, and Debt Repayment.  Focusing on securities with these characterisitics outperform relative to using just one of these strategies.  Simplistically, the combined Shareholder Yield return often indicates companies that have a strong focus on capital discipline.  It also tends to indicate companies will be less volatile in stressed markets.

I am a strong believer in this as an investment strategy.  I view this as foundational to achieving long term investment goals as its' a strategy that works in all markets.  When you consider an Index holds securities that are not focused on these fundamentals and many investment strategists and managers attempt to capture the investment trend with the most momentum of the day it can quickly lead an investor to wonder about the quality of their portfolio.