Good yield combined with consistent dividend growth equals a happy investor

Why the focus on the percentage increase in dividends? A company increasing its dividend yield from 0.1 per cent to 0.2 per cent is credited with a 100-per-cent increase. However, this is quite small in absolute terms. I would much prefer a company that increases its dividend yield from 4 per cent to 4.4 per cent, which is only a 10-per-cent increase but actually much more substantial. Surely there must be a better metric?

I don’t recall ever saying that I look at percentage dividend growth in isolation. Rather, as I said in a recent column, “As a dividend growth investor, I aim to get the best of both worlds: an above-average yield, and a high dividend growth rate.”

Like you, I have little interest in a stock that doubles its yield from a minuscule 0.1 per cent to a slightly less minuscule 0.2 per cent. Because my primary goal is to increase my investment income (and, as a bonus, to benefit from capital gains that often go along with that), I focus on stocks with higher yields that hike their payouts regularly.

Even in turbulent markets, the strategy has delivered solid results.

This month alone, I’ve received dividend increases from five companies in my model Yield Hog Dividend Growth Portfolio: Royal Bank (RY), Canadian Imperial Bank of Commerce (CM), Bank of Montreal (BMO), Telus Corp. (T) and CT Real Estate Investment Trust (CRT.UN). The average increase was about 3 per cent.

That may not seem like much, but because all of these companies have attractive dividend yields – averaging about 5.4 per cent – the increase in my dollar income will be more substantial than if I owned stocks with tiny yields that grew at a faster rate. What’s more, most of the above companies raise their dividends twice a year, so you would need to roughly double that 3-per-cent figure to estimate the annualized growth rate.

To really appreciate the power of an above-average yield combined with consistent dividend growth, however, you need to look at an entire portfolio of stocks over a multiyear period. When I started my model dividend portfolio with $100,000 of virtual “cash” on Oct. 1, 2017, it was generating annual income of $4,094. Now, thanks to dozens of dividend increases and regular reinvestment of my dividends, the portfolio is throwing off $7,050 of cash annually – an increase of about 72 per cent. (View the complete portfolio online at tgam.ca/dividendportfolio.)

And that income will only continue to grow.

Can you provide me with a list of the top 100 Canadian companies with the highest dividend yields? In descending sequence from high to low would be ideal.

You can do this yourself on Globeinvestor.com.

Near the top of the main page, you’ll see data boxes for major stock indexes and commodities. Click on “TSX,” and then “Components,” to bring up a list of stocks in the S&P/TSX Composite Index.

Next, click on the drop-down menu that says “Main View,” and switch to “Fundamental.” Use the scroll bar at the bottom of the table to move to the right until you see a column labelled “Dividend Yield.” Now, click on the column heading, and the list will be sorted in descending order from highest yield to lowest yield.

Remember that a high yield alone is not a reason to buy a stock. In some cases, a high yield may be a sign of a troubled company that is about to cut its dividend. So do your due diligence before investing.

Say I have two stocks, stock W (winner) and stock L (loser). W is up $10,000 and L is down $5,000. If I sell half my W shares and all my L shares, I am even – no gain, no loss. I understand that the Canada Revenue Agency won’t allow me to buy L again for 30 days if I want to claim a capital loss, but what about W? Can I immediately buy the same number of shares I just sold?

Yes. Let’s look at each transaction separately to make things clearer.

You have an unrealized gain of $10,000 on W. If you sell half of your W shares, you will realize a capital gain of $5,000. Half of that gain will be included in your taxable income for the year. Whether you subsequently purchase the same number of W shares won’t change that.

What will change is the adjusted cost base (ACB) of your W shares. If you repurchase the W shares at a higher price than you originally paid, the total cost of all of your W shares – and, hence, your average cost per share – will rise. This will reduce any future capital gain, or increase your loss, if you later decide to sell all or part of your W shares.

Stock L is a little trickier. If you sell all of your L shares, you will realize a capital loss of $5,000. This will fully offset the $5,000 realized capital gain on W, which means you will avoid capitalgains tax. However, if you repurchase the L shares within 30 days (before or after the sale), the initial sale will be treated as a “superficial loss” for tax purposes, and you will not be able to use it to offset your capital gain on W.

In other words, while you must avoid creating a “superficial loss” in order to claim a loss for tax purposes, there is no such thing as a “superficial gain.”