Updated: Dec 6, 2021
Everyone likes to get a pay raise once in awhile. It makes you feel appreciated, and helps you cut into those inflationary pressures we feel every year. This is more important than ever these days with the Covid recovery spending and demand-economies driving inflation to record highs.
Recently, the Canadian big banks and insurance companies have raised their dividends by 10-35%. They were on a moratorium for dividend hikes by the federal government post-Covid, and this moratorium was lifted recently. Financial institutions were not allowed to hike either dividends or executive compensation in Canada in case this capital was needed to be deployed elsewhere for national monetary support. Because of this, they built up huge amounts of capital because they weren’t allowed to redistribute it to share holders or executive compensation. It’s estimated that +$40 BB is in reserve coffers thoughout Canadian big banks, and now that the Feds are finally unwinding the monetary support, Canadian financial institutions are able to redeploy their capital. Having too much money on the sidelines is a good problem for these institutions, and they will be looking to reduce their capital reserves to improve the share prices. They do this in various ways via dividend hikes, share buybacks (to reduce future dividend payouts), or investing it in projects or aquisitions to promote future growth and/or revenues. All of these methods translate into their bottom lines, and promise increased total yields as rewards for investors, either via share price increases and/or dividend increases.
I’ll tell you what, I HAVE NEVER gotten a 10-35% raise when I was working!!!! Now in retirement, and in our withdrawal years, I’m enjoying these portfolio raises a lot more than I did before! Before we were dripping our passive income back into our investments, therefore realizing this benefit in a different way through compounding growth. In retirement, these dividend increases work differently as disposable cash to positively offset our withdrawal plans, making more money available in our accounts for either retirement income or reinvestment.
In a few banking examples, the Royal Bank of Canada increased their dividend by 11%, the Canadian Imperial Bank of Canada raised their dividend by 10.3%, and The National Bank (also the smallest of the Canadian banks) is advertising their dividend increase will be very significant and estimated upwards of 35%! Bank shares as a result have been doing extremely well this week.
This is not only a trend in the banking world, but seems to be playing out in several Canadian blue-chip companies that have squirrelled away huge amounts of capital for a variety of reasons. Some energy and pipeline stocks are exhibiting similar capital stockpiling and dividend increase potential, even though they are undervalued and a buy in today's market. I’ll use Enbridge and Pembina pipelines as an example. Even though the Canadian oil and gas sectors are experiencing government and market anti-sentiment over climate change, they are still very crucial companies in terms of energy supply infrastructure for the Canadian energy sector for the near and long term, and furthermore they have the capital reserves and foresight to pivot their business models and pipeline uses to continue to deliver growth and revenue for investors.
It’s a well known fact that investing in quality stocks is a great way to beat those annual inflationary pressures, and this recent event of Canadian bank dividend hikes averaging 15% paired with an average share price increase of 25% in 2021, are demonstrating how this works in real time. Of course, the banks' dividends are on steroids due to the last couple years of having to stop deploying capital, but now that this capital is freed up it’s a great example of how quality stocks can perform to to offset inflation. In a year where we may be facing 6-10% inflation, a 10% plus dividend hike sure eases that blow.
We have roughly 15% of our portfolio in strong, blue-chip financial (mostly) and energy stocks (lesser extent), with a history of good management, profits, and dividend increases, and look for opportunities to buy more on weakness to improve the average cost basis (ACB) of our holdings. I’m not advocating that you go all in on pure shares, and the vast majority of our investments are in one global index-tracking ETFs and one good REIT (Real Estate Investment Trust), but having some of these top tier shares on their own can take the sting out of inflation and meaningfully boost your passive income in retirement.
I think I wrote in a past blog that if you don’t or can’t do the math on good stocks that are total market movers, just check out the top 10 stocks in any quality, equity, global, index tracking ETF (eg VGRO), or any CAD market, index-tracking ETFs (eg VCN).