Dividend growth key to positive portfolio returns

Ryan Bushell - September 01, 2012

Since 1980, 73% of market appreciation can be attributed to increases in dividends so don’t get caught up in listening to all that awful global economic news

Once again, Canadian equity investors are fatigued.

Lackluster returns from the S&P/TSX Composite Index and an endless stream of negative headlines emanating from around the world have contributed to growing investor frustration.

With negative returns in 2011 and little bounce so far this year,  2012 may be the second year in four years that the S&P/TSX Composite Total Return Index has disappointed investors.

The last 20 months of negative market returns have incited numerous unanswered questions:

  • “How will the United States address its massive deficit?”
  •  “What is going to happen to Greece, Spain and the rest of the European Union?
  • “What about China? Why is their economy slowing down so fast?”

These are complicated questions that will take time to sort out. But the answer to investor frustration may lie in answering a question that George Frazer, Leon Frazer’s Chairman, has been asking for over a half century, “How’s your income?”

Instead of focusing on noise caused by global imponderables, focus on dividends

Instead of focusing on the noise caused by global imponderables, focus on building an investment portfolio consisting of companies that can grow their dividends. Focus on growing income.

Dividend income growth is the key to generating stable, positive portfolio returns over time. In 2011, Leon Frazer portfolios handily outperformed the broad market, with 70% of our equity holdings increasing their dividends by a weighted average of 8.5%. So far, 2012 is shaping up to be another solid year for portfolio dividend increases. These two years compare favorably with 2010 (the last decidedly positive year for the Canadian equity market), when only 65% of Leon Frazer holdings increased dividends by a weighted average of 7.2%. [Chart One]

Leon Frazer dividend growers

Why does dividend growth matter?  Since 1980, 73% of market appreciation can be attributed to increases in dividends. In short: increasing dividends leads to increasing share prices over time. [Chart Two]

Leon Frazer, dividends

Although Leon Frazer portfolios were sheltered from much of the frustration in the Canadian market over the last 20 months, their modest returns do not reflect the impressive dividend income growth seen since 2010. The fact that Leon Frazer’s “backbone” companies continue to grow their dividends at a time when market uncertainty remains so high is a source of great comfort.

 

ADAPTED FROM LEON FRAZER MARKET PERSPECTIVES SEPTEMBER 2012

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