Dividend Stocks in Trouble

Dividend Stocks in Trouble
The information derived in this report was gathered from multiple sources and is intended for general information only and should not be relied upon to make investment decisions. Investors should read a prospectus and seek professional advice before making any investment. Past performance is not a guarantee of future performance.
Let's be clear...dividend stocks are not really in trouble. The title is intended to convey that dividend stocks can lose value like any other stock and investors in general need to be aware of some of the risks.

Many investors like the idea of focusing primarily on a portfolio of individual dividend stocks and while that idea is attractive, there are risks that need to be considered. Dividends are not guaranteed and dividend stocks can and do lose value:

History Lesson

  • Frontier Communications (FTR) paid 25 cents/share every quarter in 2004. By 2010, the dividend was cut to 18.75 cents/share, followed by another cut to 10 cents/share in 2012.
  • In June of 2010, BP Oil suspended $2.1 Billion in dividend payments following the Gulf oil spill.
  • In 2008, General Motors suspended dividends, and the company went bankrupt in 2009.
  • J.C. Penney (JCP) was founded in 1902 and became famous for its catalogs and department stores. JCP initiated its first quarterly dividend in 1987. The company increased its dividend until 2000 when it cut its dividend for the first time from 54.5 cents to 28 cents.

In October 2000, JCP slashed its dividend again to 12.5 cents. This payout amount remained unchanged until the company saw an upside in 2005. In 2006, JCP increased its dividend from 12.5 cents to 18 cents. Although JCP’s share price began to sink in 2007, the company boosted its dividend again to 20 cents per share. During this time, its share price tumbled, and JCP’s share price continued to fall 80% over the next two years. JCP suspended its 20 cent dividend completely in 2012.

  • Coca-Cola (KO) was trading at $30.68 at the end of 2007, and paid $0.76/share in annual dividends and earned $1.29 that year. By the end of 2008 however, the stock value had fallen by 25%.
  • Many of our dividend ‘heroes’ of the recent past would have been disastrous… Lehman Brothers (LEH), Eastman Kodak (EK), Washington Mutual, Citigroup (C ) and Bank of America (BAC).

Diversification Concerns

One of the pitfalls of dividend investing is concentrating a portfolio in as little as 10-15 individual stocks. Thus, many investors risk overexposure to only a few sectors. Overexposure to financials in 2007-2009 would have been a drag on dividend income. Overexposure to high yielding sectors such as REITs or Utilities could also be disastrous for dividend incomes and total returns over time.

Many investors who follow a concentrated approach tend to get fixated on either “beating the market” or chasing yield, both which come with enormous risk to principle. Instead, a more diversified portfolio consisting of as many sectors that make sense may provide a more dependable dividend income stream with a higher margin of safety.

This dividend discussion is not intended to suggest an investor should avoid equities or dividends; Far from it; They are a valuable piece of a well-balanced portfolio strategy. The message is simply that dividends are not a “solution” to investment risk.

Special Risks for Expats - Portfolio Management

One of the risks for non-residents, particularly of Canada, is that of managing a portfolio of individual stocks from Mexico. The problem is that Security Regulations prohibit brokers from giving advice to anyone who is not physically in Canada. That's right...if you are not physically in Canada, you are on your own to make your buy-sell decisions. In fact, some brokerage firms will not even hold an account for someone who has physically left Canada to live in another country.

And, if your intention is to establish non-residency, you cannot simply give your broker a Canadian address to get around that roadblock. That could lead to a challenge on your non-residency status. In addition, the tax slips generated by such accounts could easily lead to incorrect withholdings and tax issues. For more information on non-residency rules, refer to the Canadian Non-Residency page.

For some investors, a self-directed investment online account is a solution because they can make their own trades online as a non-resident. However, online investors should remember that some day in the future they may not wish, or be able, to self-manage. What will happen then? If the surviving partner cannot self-manage, how will they cope?

What Should You Do?

What should you do? As always in the investment world, the answer is “It depends”.

One of the best options is to use a portfolio of segregated or mutual funds. Fund portfolio managers maintain the targeted diversification and make all the individual stock and bond selections. You do not have to be involved in portfolio management or stock buy-sell decisions. And, fund diversification far exceeds what would be expected from an individual stock-bond portfolio while eliminating the sector-concentration issue mentioned above.

Another option is to use your savings to Purchase a Pension, something that has gained enormous popularity as a risk-control strategy.

The solutions may not always be easy, nor will they necessarily be palatable to all investors. Check with your financial advisor. If you need help or are unsure about what strategy is best for you, we can refer you to a Canadian Financial Advisor with extensive experience assisting Canadians in Mexico with their financial affairs.

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