It’ll Pay Off to Stick with the Dividend-Paying Stocks

When central banks started to hike rates last March, we admittedly thought they would pause much earlier. But, as inflation remained stubbornly high, they kept hiking.

While inflation still sits above the U.S.’s 2% target and Canada’s 1-3% preferred range, price growth has moderated substantially. After hitting 9.1.% in the U.S. and 8.1% in Canada in June 2022, total inflation was 3.7% in the U.S. and 3.8% in Canada last month compared to September 2022.

Higher interest rates have made bonds and GICs more attractive. After all, fixed income offers much less volatility than equities. If interest rates on a fixed income security is comparable to the dividend on a stock, why take the extra risk?

First, fixed income products accompany “reinvestment risk”, which means that upon maturity, you will be left with a bunch of cash sitting in your account. While rates are lofty today – the highest since October 2007 – rates won’t stay at this level forever. In fact, the market is pricing in the first rate cut to take place next summer.

Second, since the Great Financial Crisis when rates dropped to near zero, many public companies have steadily increased their dividend on a consistent basis to attract investors to their stock. Companies have done this because fixed income investors needed to find a home for their savings that would generate regular, consistent, and steady income. Fifteen years later, many companies have tripled and quadrupled their dividend payments.

Just look at three well-known Canadian companies that have consistently increased their dividend. Let’s make October 2007 our starting point since that is the last time Canada’s 5-year bond yielded today’s 4.3% rate.

• TC Energy (formerly TransCanada Pipelines). In October 2007, the dividend was $1.44/share each year, which implied a dividend yield of 3.7% at the time. Today, the dividend is $3.72/share – over 150% higher than in 2007 – which implies a current yield of 7.7%. If the stock price doesn’t move a penny from here, you will double your money just off today’s dividend in 9.3 years.
  
  
• Scotiabank. In October 2007, the dividend was $1.88/share each year, which implied a dividend yield of 3.6% at the time. Today, the dividend is $4.24/share – over 125% higher than in 2007 – which implies a current yield of 7.1%. If the stock price doesn’t move a penny from here, you will double your money just off today’s dividend in 10.1 years.
  
  
• Telus. In October 2007, the dividend was $0.45/share each year, which implied a dividend yield of 3.1% at the time. Today, the dividend is $1.46/share – over 220% higher than in 2007 – which implies a current yield of 6.4%. If the stock price doesn’t move a penny from here, you will double your money just off today’s dividend in 11.2 years.

Third, as rates drop, demand for dividend-paying stocks will increase. This will lead to more buying and higher stock price appreciation. Until that happens, we’re locking in very attractive dividend yields that will help us double our clients’ investments sooner.