The Return of Dividends – Millennial Revolution


    Photo by Nick Youngson @ Pix4free

    There has been a lot of news from the financial world lately. As the impact of the pandemic on the economy continues to weaken, governments around the world are gradually pulling back on economic measures that have been put in place to prevent a complete economic collapse. A few months ago, both Canada and the US ended their pandemic unemployment benefit, which was used to financially support people who had become unemployed. Then the central banks announced that they would slow down or stop their quantitative easing programs, which essentially stopped printing money so that inflation could be brought under control. And now one of the last pandemic-induced financial policies is going down the path of the COVID-infected dodo: restrictions on dividend increases and share buybacks.

    When the pandemic first broke out, many countries realized they had to close their cities for at least some time, and they realized that there might not be much more unless they financially support the same businesses that they are forcing to close after the economy Revive the end of the pandemic. So many countries have put in place programs that subsidize business expenses, such as rent or salaries, in the hopes that they will keep them afloat long enough to participate in an eventual recovery.

    But at the same time, for some reason, the same governments didn’t really trust the CEOs. Well, I guess it’s not so much “kind of a reason” as much as these CEOs showed their true colors during the 2008/2009 financial crisis when they gratefully accepted government bailouts, then turned around and enriched themselves by becoming themselves even paying dividends, while their workers, for whom the money was originally intended, suffer needlessly. I mean come on! If you can’t trust CEOs to behave like decent people, who? can you trust

    In order to prevent this situation from happening again this time, the government’s funds were tied to conditions. If a company participated in any of these stimulus programs, it was prohibited from raising dividends or repurchasing shares. Seems reasonable, doesn’t it? If you’re taking government money to keep you afloat, better to use it to keep your afloat rather than buying brand new yachts for your executives.

    Money makes the world go round

    Don’t think that dividends or share buybacks are bad in any way, however. Under normal conditions, both dividends and share buybacks are a sign of a healthy, liquid company. After all, a dividend is a sign that a company is making so much money that it can’t find enough opportunities to invest it in growing its sales and instead distributes it to its shareholders. And share buybacks are similar, but return their value to shareholders in the form of a higher share price (also known as a capital gain) rather than cash.

    By banning both dividend increases and share buybacks, regulators not only prevented executives from searching their company’s coffers and sailing off into the sunset, but also forced companies to hold a much larger than normal cash reserve on their balance sheet.

    In 2008, policymakers taught the value of cash, especially to financial companies like banks and insurance companies. As much as we all love to hate banks when a number of people suddenly lose their jobs and default on their mortgages, if those banks don’t have enough cash to counter the wave of defaults, they could it is going to be forced to go on all of the Lehman Brothers and that creates a contagious effect that makes the whole situation worse, so that was the situation that everyone with these rules was trying to avoid.

    Fortunately, it seems to have worked. Banks hoard billions of dollars in anticipation of a wave of defaults. But thanks to these government programs that gave laid-off workers direct cash, that wave of defaults never came. With no immediate need for that money, and without using their normal instruments to return that money to shareholders, financial companies began building billions of dollars in their cash reserves like never before.

    That’s why the following announcement was so juicy …

    Canada’s banking regulator immediately lifts pandemic restrictions that prevent banks and insurers from raising dividends and buying back stocks, but urges bank executives to act responsibly when making long-awaited payouts to investors.

    The regulator will allow banks and insurers to raise dividends with immediate effect, The Globe and Mail

    Dividends, glorious dividends

    I’ll just come out and say I love, love, LOVE dividends.

    Many FIRE bloggers rely solely on the 4% rule when it comes to their retirement budget, which in fairness will work the vast majority (95%) of the time, but she makes the big mistake of relying on ever-rising stock prices to do the math. A bad couple of years at the start of retirement can decimate all of your well-thought-out plans, and while it’s insanely unlikely, it can happen about 5% of the time.

    That’s why we’re much more focused on the return on our portfolio than other bloggers. The return resulting from a combination of interest and dividends is far less likely to change from day to day, as opposed to capital value, which is constantly fluctuating up and down due to the fluctuations of the current news cycle.

    But if you focus on the return on your portfolio, you are automatically much safer than people who rely on capital gains. Since your return is primarily determined at the time you buy your stocks, and that return is generally paid out regardless of whether the value of the stock goes up or down, you don’t care whether you make a living within the return of your portfolio on what the market does. It could go up, it could go down, but you still get your return. You become immune to market volatility.

    That’s why I wrote our Yield Shield series. If you are on your way to FIRE, your best bet is to stick with a simple indexed portfolio like we recommend in our investment workshop, but once you actually retire and need the income, the game changes.

    And to people like me, dividend hikes are like music to our ears. Because when a company increases its dividend, it signals that it has way too much money and doesn’t know what to do with it. This inevitably leads to your share price rising too.

    We are already beginning to see this effect. Dividend increases have been allowed since last Thursday. A day later, one of Canada’s largest insurance companies announced the following:

    Manulife Financial Corp. is the first Canadian insurer to announce a dividend increase after Canadian banking regulators lifted pandemic restrictions.

    Manulife raises dividend 18 percent after regulators lift pandemic restrictions, The Globe and Mail

    Correctly. Not only did they increase their dividend, they increased it by 18%. That’s crazy. Dividend investors hope that their companies’ dividends outperform inflation under normal circumstances, but as we all know, these are not normal circumstances. 18% is an insane dividend hike and it really reflects how much cash these companies are sitting on more than anything else. The day after this was announced, I logged into our passive dashboard and was stunned to learn that this change alone had increased our combined portfolios by $ 30,000 in one day!

    And remember, this is just a company. Most of the major banks in Canada won’t announce anything until the end of November, but they are all sitting on huge piles of money like Manulife. If all Canadian banks were to simply roll their dividend payout ratios back to pre-pandemic levels, we would expect an increase of 20% and more across the board.

    The next few months will be an extremely interesting time for index investors like us, that’s for sure …


    We’re getting out of this pandemic. It wasn’t easy for, well, any from us, but it looks like we are slowly returning to something normal. And whether it means going back to restaurants or having a barbecue with your friends or, in our case, getting dividends back to the levels we were used to before the pandemic, I’m so glad to see that this happens a return to financial normalcy.

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