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57%* of dividend-paying firms across the world either cut (43%*) or eliminated their dividend (14%*) during the financial crisis of 2008-2009 and “the year after 2008’s global market decline, aggregate dividends fell by 20%.”*

*Source: “Global Dividend-Paying Stocks: A Recent History,” A March 2013 DFA study covering 23 developed markets.

Pretty scary stuff if you plan to rely on dividend income in retirement, but this covers all dividend-paying companies in 23 countries.

As a Canadian dividend growth investor, I want to know how Canadian Dividend Growth Stocks and their dividend income held up during the global financial crisis.

Here’s what I found out…

I was surprised to find out that only dividend growth stocks with a dividend streak of 8 years or less at the end of 2007 cut their dividend during the global financial crisis.

The take-away … quality matters and a longer dividend streak is important.

FYI – A dividend streak is the number of years the stock has increased its dividend in a row.

Before we dig into this too much more, it’s important to understand where this information is coming from.

How I found 2007 & 2008 Canadian Dividend Growth Stocks

I wasn’t able to use the Canadian Dividend All-Star List (Spreadsheet with all Canadian listed companies with dividend streaks of 5 years or more) as I created it about 4 years after the crisis.

Instead, I relied on the Claymore CDN Dividend & Income Achievers ETF (TSE:CDZ), which would later become the better known iShares S&P/TSX Canadian Dividend Aristocrats Index ETF.

The Claymore CDN Dividend & Income Achievers ETF tracked Mergent’s Canadian Dividend & Income Achievers Index which had the following criteria:

  • Dividends and Distributions:
    • Common shares: annual regular dividend payments must have increased consistently over the course of the past 5 years.
    • Income trusts and REITs: regular distributions must have been paid consistently over the course of 2 years (increasing each year until the 5-year history was established).
  • Liquidity: Average daily cash volume of $500,000 in November and December.
  • Established in Canada and trade on a major Canadian exchange.

Source: April 25, 2008, Claymore CDN Dividend & Income Achievers ETF Prospectus

A limitation of this index is liquidity. By limiting the average daily cash volume of $500,000 in November and December there were likely some small/illiquid dividend growth stocks that were missed.

Digging into the Results

I looked at Dec 31, 2007, June 30, 2008, and December 31, 2008, annual and semi-annual Claymore CDN Dividend & Income Achievers ETF (CDZ) reports to find…

63 Canadian Dividend Growth Stocks [Dividend Aristocrats] in the Claymore CDN Dividend & Income Achievers ETF (TSE:CDZ) on December 31, 2007, June 30, 2008, And December 31, 2008

Of the 63 Canadian Dividend Growth Stocks…

25 (39.7%) Kept Increasing the Dividend Every Year in 2008-2011

25 (39.7%) Kept the Same Dividend as A Prior Year At Least Once in 2008-2011

13 (20.6%) Cut the Dividend Sometime in 2008-2011

It gets a bit complicated, because …

8 of the 13 Dividend Cutters were Income Trusts that also Converted to a Corporation Sometime in 2008-2011

A change in income trust rules was announced in late 2006 that came into force on January 1, 2011. As a result, most income trusts converted to corporations and cut their dividends during this process.

Some of these cuts weren’t actually related to the global financial crisis, and some were likely related to both the income trust conversion and the crisis.

Parkland Income Fund, for instance, kept annual dividends steady at $1.26 in 2008, 2009, and 2010, but when it converted to a corporation (Parkland Fuel Corporation) dividends dropped to $1.1019 in 2011. This isn’t likely a result of the global financial crisis, but rather the income trust conversion.

Other income trusts that converted to a corporation in 2008/2009 likely cut for a mixture of both reasons.

My best guess is that 10 of the 13 dividend cuts were related to the global financial crisis. The other three dividend cuts that I think were solely due to income trust conversions are:

  1. DH Corporation, formerly Davis + Henderson Corporation, formerly Davis & Henderson Income Fund,
  2. Parkland Fuel Corporation, formerly Parkland Income Fund, and
  3. AltaGas Ltd., formerly AltaGas Income Trust.

This would mean …

My Best Guess is that 15.9%, or 10 of the 63 Canadian Dividend Growth Stocks Cut Their Dividend Due to the Global Financial Crisis

 

But what about dividend income?

You’ll remember that…

“the year after 2008’s global market decline, aggregate dividends fell by 20%.”

Source: “Global Dividend-Paying Stocks: A Recent History,” A March 2013 DFA study covering 23 developed markets.

Despite having 57% of global dividend-paying firms cut or eliminate dividends, dividend income only dropped 20% in 2009.

So how did our 63 Canadian Dividend Growth Stocks do?

Here are the results:

Had You Invested Equally in All 63 Canadian Dividend Growth Stocks During the Global Financial Crisis, Dividend Income Would Have:

Increased By 10.3% in 2008,

Decreased By 4.4% in 2009,

Increased By 3.8% in 2010^, and

Increased By 6.0% in 2011^

^ Livingston International Income Fund was taken private in 2010 so it was removed from the 2010 and 2011 calculations.

So even though ~21% of the stocks cut their dividend at some point during 2008-2011, the drop in dividend income in 2009 was only 4.4%.

Frankly, I was expecting worse.

During the Global Financial Crisis, Had You Invested Equally in the 24 Canadian Dividend Growth Stocks with Dividend Streaks at the End of 2007 of 10 Years or More, Your Dividend Income Would Have Increased Each Year. Dividend Income Would Have:

Increased By 9.9% in 2008,

Increased By 3.9% in 2009,

Increased By 3.7% in 2010, and

Increased By 6.5% in 2011

Once again, the message is quality matters and a longer dividend streak is important.

As surprising as these numbers are (I was expecting way worse), I don’t want you to think that if you just invest in companies that have a dividend streak of 10 years or more then you don’t have to worry about dividend cuts.

For example, dividend aristocrats in the US are defined by 25 years of consecutive dividend increases and some of these stocks cut their dividend during the global financial crisis.

According to Johnathan Weber’s SeekingAlpha article: Should Retirees Worry About Dividend Cuts From Dividend Aristocrats?

“Investors who were living from their dividend proceeds prior to the financial crisis would have seen a 16% income reduction from an equal weighted [US] dividend aristocrat portfolio”

Summary & 3 Important Take-Aways

Quality matters when considering dividend growth stocks and a longer dividend streak is important.

Only Canadian dividend growth stocks with a dividend streak of 8 years or less at the end of 2007 cut their dividend during the global financial crisis.

Of the 63 Canadian dividend growth stocks that existed before the global financial crisis

  • 25 (39.7%) kept increasing the dividend every year in 2008-2011
  • 25 (39.7%) kept the same dividend as a prior year at least once in 2008-2011
  • 13 (20.6%) cut the dividend sometime in 2008-2011

Some of the dividend cutters were income trusts that also converted to a corporation sometime in 2008-2011, so my best guess is that 15.9% (10 of the 63) actually cut their dividend because of the global financial crisis.

Even though ~21% cut their dividend at some point during 2008-2011, the drop in dividend income in 2009 would only have been 4.4% had you invested equally in all 63 stocks. The dividend income increased in all other years.

Had you invested only in stocks with +10-year dividend streaks your dividend income would have gone up each year from 2008-2011, including 2009 which would have seen a 3.9% increase.

Even though a 10-year streak in Canada was enough to avoid a dividend cut in the financial crisis, it wasn’t in the US. The US dividend aristocrats, which have +25-year dividend streaks, would have lost dividend income of 16% from an equal-weighted US dividend aristocrat portfolio.

If you are a long-term investor, then at some point you will suffer a dividend cut, but there are three things you can do to reduce the impact/risk of a dividend cut.

  1. Quality matters. Focus on stocks with longer dividend streaks as they appear less likely to cut their dividend.
  2. Diversification is important. Don’t put all your eggs in one basket.
    • Pay attention to the number of stocks you have, but also the amount of income each investment pays.
    • Say you owned a high-yield stock that represented 5% of your portfolio, but 15% of the portfolio’s income and they eliminate the dividend. You just lost 15% of your income with one stock.
  3. If you rely on dividend income, keep a buffer by planning to have 20-30% more than you need, or have an emergency fund in place.

 

Disclosure: I own shares of Atco Ltd (TSE:ACO.X), Bank of Nova Scotia (TSE:BNS; NYSE:BNS), Canadian Utilities (TSE:CU), Canadian Western Bank (TSE:CWB), Enbridge Inc. (TSE:ENB; NYSE:ENB), Ensign Energy Services Inc. (TSE:ESI), National Bank of Canada (TSE:NA), and Suncor Energy (TSE:SU). You can see my portfolio here.

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14 Comments

  1. Thank you for the article.
    Is it possible to extend this all the way to 2019 and showing YoY dividend growth?

  2. Excellent summary.

    It would be cool to add the price growth factor.

    A good example would be MFC where they cut the dividend, while SLF maintained the dividend. I believe the combined income and growth for SLF would show it to have been a better investment during the period.

    This may not always be they case though, however the combined dividend and capital growth would be revealing.

  3. Quote “Say you owned a high-yield stock that represented 5% of your portfolio, but 15% of the portfolio’s income and they eliminate the dividend. You just lost 15% of your income with one stock.”

    Indeed. ISTM that there’s an argument for weighting one’s portfolio not by the value of individual stocks, but by the income from individual stocks.

  4. A HUGE thank you for taking the time to put this together. Many of us have heard that DFA study quoted before but this is the first time I’ve seen the relevant Canadian data analyzed. This is very important information, not just to correct some misguided thinking about a dividend-based approach, but also to guide our investment decisions (your “3 important take-aways”). In fact, with your permission, I would love to reference this data on our site. Please let me know if you’d be ok with this. Thanks again!

  5. The analysis was based on the CDZ constituents in 2008 – which was when BCE was considering becoming an income fund. BCE cancelled its dividend payments for a period in 2008 – which likely caused its removal from the CDZ list.

  6. Whoever assemble this information must have spend a lot of time for the benefit of the readers. A big THANK YOU for sharing this with us.

  7. Great article! Only negative thought is that 2008-9 is long ago, even “longer” in terms of what happens in more current time. I hope you’ll update it to current.

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