I have been a dividend growth investor since 2011. I invest only in companies that pay a dividend, and which have a track record of growing the dividend over time. My holdings consist primarily, although not exclusively, of blue chip companies. Part of the reason for this is that these companies tend to be less susceptible to severe cash flow fluctuations, and as result experience less downward pressure on their dividend.
That said, I have not been immune to the outrageous fortune of dividend cuts. In the last few years alone, Baytex, BHP, Crescent Point and Potash have all cut or eliminated their dividend (I subsequently exited each). One of the hard-earned lessons for me was that commodity stocks in general, and energy producers in particular, were simply too volatile to fit within my strategy. As result, the percentage of commodity stocks in my portfolio has declined from approximately 25% a few years ago to less than half of that today.
Having been on the wrong end of significant dividend cuts, or worse, the dividend being eliminated entirely, it is nice and every once in a while to get a positive surprise in the form of an unexpectedly large dividend increase. That is precisely what I was treated to earlier this week when ZCL Composites (ZCL-T) announced a dividend increase of 50%. Although the stock is now trading at $13.23 per share and yielding 2.42% (not factoring in the latest increase), my purchase price was $9.10, when it was yielding 3.56%. To have an already sizeable dividend juiced by 50% is a bonus to say the least.
Then, just when I thought the news could not get any better, in the same earnings release, ZCL also announced a special dividend of $0.65 share. That amounts to an almost 5% return on the current share price, and over 7% based on my cost. I think I might cry!
So is this post merely just an exercise in gloating? Yes. Of course not. Instead, it is a reminder that just because you experience a few bumps along the way in the form of dividend cuts, this should not deter you from staying the course. I can assure you that no one was more frustrated than me when the stocks noted above slashed, or eliminated, their dividends. However, rather than panic sell or throw in the towel completely on my dividend growth investing strategy, I assessed what had happened, and tried to learn from it. My takeaway was that while commodity stocks may fit nicely into other people’s portfolios, they are not for me. Armed with that knowledge, I altered my strategy accordingly, and believe I am now a better investor for it.
Lest anyone think I am now of the belief that I am immune to future dividend cuts, I am a lot of things, but terminally naïve is not one of them. I plan to be around for many, many more years, and no doubt over that time I will get stung again. However, when that happens, I am confident that I will understand that no matter how unpleasant a dividend cut feels at the time, it is not a fatal blow to my portfolio, but instead just a little bruise that will heal over time. After the requisite period of whining and feeling sorry for myself, it will be just a matter of picking myself up, wiping away the tears, and moving on to the next opportunity.