Welcome to my May 2012 Investment income update. For anyone new to this site I generally try to post Investment Income Update close to the beginning of each month as an exercise in tracking my success at building a dividend growth portfolio. This year on of my goals is to grow my investment income by 20% using three basic pillars: dividend growth, strategic income reinvestment and finally by changing my asset mix. Assuming I can increase the amount of investment income generated faster than inflation and salary growth each year then I will be generating a larger and larger income stream over time. I like to think of this as my own personal pension plan. Without further ado here is this months investment income update.
May was a reasonable month for investment income growth through new purchases, however there was a large reduction in income from fixed income and dividend ETF’s (presumably as these funds rolled over their investments into lower yielding investments. This is a common problem with fixed income investments that is largely avoided when holding dividend growth stocks. Of course the possibility of a dividend cut is always available. With a little bit of luck and some research hopefully we can avoid that.
- Dividend Growth (-0.90%)First of all not unexpectedly there were no dividend increases in the month of May. None of the stocks I own raised there dividends last May either. The negative dividend growth shown here highlights 3 different issues:
- How I track my investment income.
- How products choose to distribute investment income.
- Risks inherent in certain income producing products.
I will quickly explain how each of these factors can lead to unpredictability in investment income.
First, Since my investment income tracking is actually a projection (projected investment income) of what dividend income I should receive in the next 12 months, there are imperfections in the calculation. projected investment income is calculated by multiplying currently announced dividend by number of dividend periods in the year for each investment that pays a dividend. This works great for investments that pay predictable dividends such as dividend growth stocks. But if the income payed in each dividend period is not uniform this will cause the projected dividend income to bounce up and down. Perhaps a better way to track the investment income of such vehicles would be to use the trailing twelve month dividend payout, I will consider this as a future modification.
Second certain products, ETF’s in particular may not pay the dividends evenly in each dividend payment period.
XDV.TOis a good example of this, it seems to pay the dividends that have come in in a particular month causing significant variations in its payout ratio from month to month. This value then gets multiplied by 12 for the number of dividend payments in the year and thus can fluctuate widely.
CDZ.TOdoes a better job of smoothing out the ups and downs, however do to portfolio re-weighting and other factors it also does not actually pay an ever increasing stream of income. However from year to year in a good dividend growth environment the trend should be to flat or rising dividends on a yearly basis.
Finally most of the fixed income funds will eventually need to cut their payouts if interest rates are perpetually declining as they will be rolling over into new bonds at lower interest rates. This provided extra reductions in my investment income. What follows is a list of the ETF’s that had reductions in investment income.
iShares Advantaged High Yield Bond ETF CHY.TO was down 8.3%, iShares Dow Jones Canada Select Dividend Index ETF
XDV.TOdown 10.1%, iShares S&P TSX Canadian Dividend Aristocrats
CDZ.TOdown 1.33%, iShares DEX Short Term Bond Index Fund
XSB.TOdown 1.1%, iShares DEX Real Return Bond Index Fund
- New Purchases (+1.28%) Dividends received from Northland Power
NPI-UN.TOalso as there have been significant pullbacks in many stocks I am following. I added to my position of
TCL.Athis was the major contributor to the new purchase income.
- Investment Mix (+0.0%) Again nothing to add here, due to the current volatile environment in the markets the funds which I am intending to convert into income holdings are below the level that I had set as the desired amount. I am going to have to make a decision about whether moving them to the income portfolio can provide me better results than leaving them where they are. I am strongly leaning toward yes as the answer in that case I should just cut my losses and begin deploying them into income positions
Investment Income May’s Conclusion
May was a slow month for dividend increases and a lot of headwinds were provided by the reductions in dividends in my income and dividend ETF’s. I don’t expect that these will provide much further downside and more likely will actually move back up over the remainder of the year. (At least the dividend funds). Finally there are some more attractive valuations appearing lately within the dividend paying universe this is allowing me to selectively purchase stocks which are sporting higher yields and more potential for capital gains. I am not deluded into thinking that valuations in general are cheap however if you are wondering why look no farther than the following article in the Globe and MailYes Virginia, The S&P 500 is overvalued written by Norman Rothery. I am a fan of the Shiller P/E as a way of determining relative valuation and also like to use CAPE in my calculations of company valuations. Now it would be nice to have the Shiller P/E for the S&P TSX as well for comparisons sake…
Until my next investment income update hope you are progressing on your path to becoming DividendRich
Full Disclosure: Long all securities listed in this article
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