Video of the Week: The Dividend Cut in Disguise


As you might have read about it here, I now do live webinars and certainly have fun doing so. I have been surprised by the positive interest attendees had towards many of my stock picks. This is how I came to the idea of sharing here some of my “Video of the Week”, during wich I go through a company recent news or results and explain why I believe it is currently a good or a bad pick for a dividend investor.

This week’s video is a bit different however! I wanted to address a very important topic for all dividend investors: the dividend cut in disguise. I covered it last week on the blog, but video gives me the opportunity to comment a little more on the topic in less time. I hope you’ll enjoy!


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00:00 Mike: Hey, fellow investors. This is Mike Heroux from Dividend Stocks Rocks. I hope you’re doing well today. Instead of talking about specific dividend stocks this week, I decided to discuss a completely other matter. We’re going hear about what I call a dividend cut in disguise. So this video is a little bit more for retirees, people that are 60 years old and up, income-seeking investors, most likely not working anymore or not working much and depending a lot on their investment income to support their lifestyle. Those kind of investors usually prefer to invest in REITs or other companies paying 8%, 9%, 10% dividend yield mostly because they need that kind of money to sustain their retirement.

00:56 Mike: And now that it’s been 10 years that we haven’t went through a recession, a market crash, or any bubbles I’d say that pretty much all companies look good, right? The numbers are there, the growth is there, the appetite for debt from the market is there so most companies are able to grow by acquisition or by refinancing their debts to increase more, to have more money, and then generate additional cash flow. So, all those reasons makes you believe that a lot of your companies are not cutting their dividend and they’re just flying under the radar paying you those high yield and you don’t even realize that those dividends are being cut right now right under your nose. ‘Cause the thing is, it’s not only about income and it’s not only about keeping the same dividend payout quarter after quarter or month after month, it’s about increasing it.

01:55 Mike: When a company stop increasing its dividend, it’s making a dividend cut in disguise. Why is that? Because Mr. Inflation comes into the party. So imagine that you bought shares of a company back in, I don’t know, 2013 let’s say, so five years ago, almost six years ago and the payout has been the same for the past five, six years. You used to make 10% yield and now the market goes up and down, but based on your investment today you’re still making that 10% return on your investment because you’re receiving your quarterly paycheck. The problem though during that time is cost of living is increasing year after year. You pay more for your food, you pay more for your gas, you pay more for traveling, restaurant, pretty much any activities cost more in 2018 than it used to cost in 2012 or 2013. So while your budget is going like this over time, your dividend payment is going like this. So, at one point in time, what happened is, if you used to need $30,000 a year to live up in a comfortable retirement, now you need 35, and then you’ll need more but if your portfolio still generates the same 30,000 you’re starting to get cut.

03:20 Mike: And this is why they’re cutting their dividend without you knowing it because they are not able to grow fast enough, they’re not able to increase their cash flow in a matter to share the wealth with investors and keep up with inflation. Now, keep in mind that what I said at the beginning of this presentation, we are running in a super nice market, the economy’s doing well, unemployment rate is down, everybody’s happy on the stock market, which means that they’re willing to buy more debt, so the appetite for debts, for bonds is very good. So, any companies can issue more units or ask for more bonds and the market will give it to them.

04:05 Mike: One day, this part of the market will slow down. It might eventually crash. And I’m not telling you this because I want to scream with my red flag that the next market crash is coming for December 31, 2018. I’m just telling you that the market evolves in a cycle so we have upsides and downsides, and we’ve been running on a upside for several years. Therefore, what’s gonna happen if this company in a great economy is not able to increase its dividend? What is it going to happen when the economy is not so great anymore? Well, you guessed it, a real dividend cut. The problem with companies that are not increasing their dividend for five, six, seven years is because that they put their dividend payment on just some kind of artificial respirator, so basically they’re just waiting the right moment to pull out the plug and cut the dividend.

05:10 Mike: When you think about it, if management adds financial issues to increase the payout, what are they gonna do? They’re gonna try to find additional growth vectors, they’re gonna try to refinance their debts, make an acquisition to increase their cash flow, issue more units so they can somewhat prove you that they’re growing. But at one point in time, if all those strategies doesn’t come to a steady dividend growth policy, this means that at the first speed bump, at the first problem, the first recession, the first thing that is not paying, they will have to cut their dividend. So they’re waiting the last moment to do it, but fear not, if a company cannot increase its dividend they’re the first in line to cut their payout.

06:01 Mike: So thinking about that, now look back at your portfolio, look at all your companies, pull out the past three and five years and check which companies haven’t increased their dividend. And I’m telling you, those are having a high chance of being the first to cut their dividend. If they do that, you’ll not only lose a part of your revenue but you will also lose a part of your portfolio because upon a dividend cut, most company shares are going down. So you’re not only losing the revenue that is coming in the future, you’re actually losing real value today, and this you cannot come back from it. So while the market is up, what I’m telling you is, look back at your portfolio, identify the non-dividend growers and start selling them. Look for better alternatives.

06:52 Mike: I hope that you enjoyed this video. If you wanna read the whole study behind it, the whole article, the link is right below in the note and on to my blog, Register to my newsletter to get that. If you wanna be notified for my other videos, don’t forget to subscribe to the new YouTube channel and hopefully that you have enjoyed it. I’ll end it up with this small disclaimer, everything that is being said on this video or by Mike Heroux at Dividend Stocks Rocks cannot be taken as a buy or a sell recommendation. I am not your financial broker or your financial adviser, therefore, you cannot sue me if you’re losing money after watching this video. And on a good side of things, you won’t have to pay me a dime if you’re making some money and avoid some dividend cut. So, until next week, I’ll tell you, take good care of your portfolio, watch the market, and happy investing. Cheers.

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