As the economic contraction intensifies, more and more companies with excellent long-term records of paying dividends are cutting or eliminating them altogether. But there are some plucky firms that have courageously announced dividend increases right in the teeth of the recession. Do these folks have some kind of "special sauce" that is an antidote to what ails the economy?
Investor interest in non-cyclical stocks that can pay a healthy dividend in good times and bad is nothing new. In fact, a cottage industry has grown up to identify such candidates for value investors. Standard and Poor's has its long running S&P Aristocrats Index, and more recently a similar index was added for the TSX. Others maintain lists of dividend "champions" and "achievers".
Here's another entry for the genre: the Dividend Knights portfolio. The selection criteria is somewhat less exacting and more subjective, but the idea was to come up with a reasonably balanced team of ten companies that are truly sticking a finger into the recession's eye.
All of these brave knights have announced dividend increases in the past three months. In most cases, the increases are quite substantial, and go beyond adding a half penny just to maintain bragging rights to a long streak of yearly increases. Other factors considered were relative yield, low payout ratios and a strong competitive position. Bonus points were added for style and swagger.
Canadian National Railway, $43.90
Despite weaker freight volumes it's full steam ahead for CNR. Full-year profit for 2008 came in at $1.9 billion, helped by a weaker Canadian dollar and fuel surcharges during last summer's price spike. The dividend was hiked by a solid 10 percent to an annual rate of $1.01.
Enbridge is one of those nice, well-run companies that make Warren Buffett smile. Regulated utilities drive 95 percent of its revenue, and even in recessions people tend to find money to pay the gas bill. CEO Pat Daniel swept aside the doom and gloom and made raising the dividend by 12 percent to $1.48 per year sound like a no-brainer: "We are able to forecast growth in earnings much more accurately in a company like Enbridge than a company that would carry commodity sensitivity," he explained.
No, this isn't the Belgian financial giant that was sucked into the financial maelstrom and completely scrapped its dividend. This mild-mannered St. John's-based utility happens to have a remarkable track record of profitability and growing dividends that goes back more than three decades. The increase for 2009 was a "modest" 4.2 percent to $1.04 per year.
SNC-Lavalin Group, $31.50
Did somebody say "infrastructure"? Investors who are wondering about a company that can grab a piece of stimulus pie being dished out from Ottawa will find that this engineering giant is waiting with slavering anticipation. Shovel at the ready, SNC expects to bury the recession with net income growth of 7 to 12 percent in 2009. That rosy outlook let the company hike the dividend by 25 percent to an annual rate of 60 cents a share.
Thomson Reuters, $31.66
In an era when so many media companies are being devastated, it is astonishing to see one swim against the current and raise its dividend, albeit only nudging it up by 3.7 percent to $1.12 per year. The publisher's revenue stream is quite diversified, and profits from its legal division have been strong. As CEO Thomas Glocer explained, "Everyone's trying to sue anyone with any assets left standing."
While Pepsi maintained its dividend, Coke raised the ante by bumping its own by 8 percent to $1.64, once again proving that when it comes to making money out of sugar water, it is the real thing.
Holding this stock has been as comfy as soaking in dish detergent. The company has topped off 45 years of dividend increases with a lovely 10 percent hike to $1.76 a share. Selling everyday stuff to everyday people is about as defensive as you can get.
General Dynamics, $43.07
Isn't that Obama guy a peace-mongering liberal who will cut the Pentagon budget? That doesn't seem to worry this defence contractor, which fired the afterburner on its dividend to the tune of 20.7 percent to $1.40 a share.
Many consider this one an evil empire, bent on dominating the world's consumers with cheap stuff made in China, but it's easy to argue that this behemoth was built for hard times. Same-store sales have been going in the opposite direction to the vast majority of retailers, fuelling a sterling 15 percent increase in the dividend to $1.09 a share.
Royal Dutch Shell, $46.83
Most of the large integrated oil companies are complaining bitterly about being squeezed between the crash in the oil price and rising costs of production. Shell is having none of it, taking a rosy view that led it to raise its dividend by 5 percent to $1.68 a share. Besides, the jaunty foreign guy rounds out the squad nicely.
We don't own any of these stocks. As good as their dividends look, we suspect that their potential for capital gains are muted. If they subsequently backtrack on these dividend increases, they are apt to be severely punished. That doesn't put them in our risk/reward sweet spot, but nevertheless, this group of stocks makes for an excellent benchmark with which to compare our own performance.
Incidentally, setting up such a hypothetical portfolio with the Globe portfolio tool is dead simple and quick. By setting a default date and a default investment amount — say, March 26 and $10,000 — the tool will pick up the closing prices and calculate the appropriate number of shares for an equally weighted portfolio totalling a $100,000 investment. All the subsequent dividends are automatically tracked. We'll check up on this portfolio later and report how it's doing.