The Return of Dividends

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There’s been a lot of news in the finance world lately. As the pandemic’s effect on the economy continues to ease, governments all over the world are gradually pulling back the economic measures that were put in place to prevent the economy from completely collapsing. A few months ago, both Canada and the US ended their pandemic unemployment benefits that financially supported people who were thrown out of work. Then, central banks announced that they would slow or eliminate their Quantitative Easing programs, essentially stopping the printing of money so that inflation can be brought under control. And now, one of the last pieces of pandemic-related financial policies is going the way of the COVID-infected dodo: restrictions on dividend increases and share buybacks.

When the pandemic first hit, many countries recognized that they would need to shut down their cities for at least some time, and they realized that if they didn’t financially support the same businesses they forced to close, there may not be much of an economy to come back to once the pandemic was over. So many countries implemented programs that would subsidize businesses expenses like rent or salary, in the hopes that it would keep them afloat long enough to participate in the eventual recovery.

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

So to prevent that situation from happening again this time, the governments money came with strings attached. If a company participated in any of these stimulus programs, they were forbidden from raising dividends or performing share buybacks. Seems reasonable, right? If you’re going to take government money meant to keep you afloat, you’d better actually use it to stay afloat rather than buying your executives brand new yachts.

Cash is King

That being said, don’t think that dividends or share buybacks are somehow a bad thing. Under normal conditions, both dividends and share buybacks are a sign of a healthy, cash-rich company. A dividend is, after all, a sign that a company is making so much money that it can’t find enough opportunities to invest it towards growing their revenue, so instead they choose to distribute it among their shareholders. And share buybacks are similar, but return their value to their shareholders as a higher stock price (a.k.a capital gain) rather than cash.

So by forbidding both dividend increases and share buybacks, regulators not only prevented executives from raiding their company’s coffers and sailing off into the sunset, it also forced companies to keep a much higher-than-normal cash reserve on their balance sheet.

2008 taught policy makers the value of cash, especially for financial businesses like banks and insurance companies. As much as we all love hating on banks, when a whole bunch of people lose their jobs at once and start defaulting on their mortgages, if those banks don’t have enough liquid assets to counteract the wave of non-payments, they might be forced to go all Lehman Brothers on us, and that causes a contagion effect that makes the whole situation worse, so that was the situation everyone was trying to avoid with these rules.

Fortunately, it seems to have worked. Banks hoarded billions of dollars in anticipation of wave of defaults. But thanks to those government programs that gave cash directly to laid off workers, those wave of defaults never came. So without an immediate need for that money, and being banned from using their normal tools of returning that money to shareholders, financial companies began building up billions of dollars in their cash reserves the likes of which had never been seen before.

Which is why the following announcement was so juicy…

Canada’s banking regulator is immediately lifting pandemic-related restrictions that prevented banks and insurers from raising dividends and buying back shares, but is urging bank executives to act responsibly as they deliver long-awaited payouts to investors.

Regulator will allow banks, insurers to raise dividends effective immediately, The Globe and Mail

Dividends, Glorious Dividends

I’m going to just come out and say it: I love, love, LOVE dividends.

A lot of FIRE bloggers rely solely on the 4% rule for their retirement budget, which to be fair will work the vast majority (95%) of the time, but it does have the major flaw of relying on constantly-increasing stock prices to make the math work. A bad couple of years at the beginning of retirement can decimate all your well-laid plans, and while it’s insanely unlikely, it can happen in about 5% of cases.

That’s why we are much more focused on the yield of our portfolio than other bloggers. Yield, which comes from a combination of interest and dividends, is far less likely to change day-to-day, unlike capital value which fluctuates up and down constantly based on the gyrations of the current news cycle.

But when you focus on your portfolio’s yield, you are automatically way safer than people who are depending on capital gains. Because your yield is mostly determined at the moment you purchase your shares, and that yield generally gets paid regardless of whether the stock’s value goes up or down, if you manage you get your living expenses within the yield of your portfolio, you no longer care about what the market does. It could go up, it could down, but you get paid your yield regardless. You become immune to market volatility.

That’s why I wrote our Yield Shield series. When you’re on your way to FIRE, it’s best to stick to a simple indexed portfolio like the one we recommend in our Investment Workshop, but once you actually retire and need the income, the game does change.

And for people in that situation like me, dividend increases are like music to our ears. Because when a company increases their dividends, they are sending out a signal that they have way too much money and don’t know what to do with it. That inevitably causes their stock price to rise as well.

We’re already starting to see this effect. Dividend increases were allowed as of last Thursday. A day later, one of Canada’s biggest insurance companies announced this:

Manulife Financial Corp. is the first Canadian insurer to announce a dividend hike after Canada’s banking regulator lifted pandemic-related restrictions.

Manulife raises dividend by 18 per cent after regulator lifts pandemic restrictions, The Globe and Mail

That’s right. They not only increased their dividend, but they increased it by 18%. That is insane. Dividend investors hope to see their companies dividends beat inflation under normal circumstances, but as we all know, these are not normal circumstances. 18% is an insanely high dividend hike, and is really a reflection of how much cash these companies are sitting on more than anything else. The day after this got announced, I logged into our Passiv dashboard and was stunned to learn that our combined portfolios had gone up by $30,000 in 1 day from this change alone!

And remember, this is just one company. Most of the major banks in Canada won’t be announcing anything until late November, but they are all sitting on giant piles of cash just like Manulife. In fact, if all the Canadian banks simply restored their dividend payout ratios to their pre-pandemic levels, we would be looking at 20%+ increases across the board.

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


We are getting out of this pandemic. It hasn’t been easy for, well, any of us, but it looks like we are slowly returning to something resembling normal. And whether it means eating out at restaurants again, or being able to BBQ with your friends, or in our case, seeing dividends start to pop back to the levels that we were used to pre-pandemic, I for one am so freaking glad to see a return to financial normalcy.

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31 thoughts on “The Return of Dividends”

  1. Nice. Our dividend income dropped a bit over the last two years. Hopefully, we’ll get a little boost from this development. Will it be enough to compensate for high inflation? I guess we’ll have to wait and see.

    1. Though not as much as I would have thought. I calculated that overall, dividends dropped maybe 5% or so because of the pandemic, which ain’t too bad at all.

  2. I always enjoy your take, Wanderer. I have one caveat. Over-indexing on dividends can be harmful to many investors because they end up owning fewer of the most dynamic companies in the tech sector (some of whom don’t pay dividends)–and often start reaching for yield buying poorer quality businesses.

    With that caveat, let’s all enjoy those dividends!

    1. Agreed. My dividend stock index (PDC) is limited to 10% of my portfolio, but the nice thing is that the broader index will be impacted as well, so double-whammy!

  3. Congrats on your portfolio performance. That’s great !

    As for the withdrawal rule, I am personally aiming for 3% instead of 4%, altough I am still closer to 4% at present time. Remember the 4% rule is based on the assumption of a 30-years time horizon. So that assume the assets will likely deplete over time.

    When you go toward the 3% rule, your assets are constantly increasing over time. And, this is exponential. Meaning, the increase is not always the same, but it is bigger and bigger over time.

    I like the dividend approach also. But it can lead to other problems like bad investments decisions (invest in a company solely for the dividend regardless of the quality of the company or ETF) or to withdraw too little from the portfolio. Personally, my dividend yield is currently at 2.3%, so it would be too little for me at this point.

    Manulife dividend increase was great news. I own a few shares. However, that is an increase of 18% for two years (since dividend increases were frozen in 2020). So that’s 9% increase annually. Still good. Or, maybe I am just getting too greedy… :-/

    There was also Suncor recently announcing a 100% increase in dividend. That was great news for me since I made it recently one of my biggest position in my portfolio (2nd biggest to be precise – 5.4% allocation).

    In general, I don’t like government interventions in private companies. Companies going out of business or failing because of over indebtedness should be normal. Some will fail and some will win. That’s just the way it is. Governments should have no involvement in this. My opini0n only. But I try to make decisions based on what is done, and not what I wish should be done.

    Anyway, I’m glad this pandemic is nearing an end. This was a terrible time. I hope we can get back to normal as soon as possible and that everyone will be fine. The only thing is I think we will have a lot of inflation in coming years. Let’s see what happen – I will adjust accordingly if that is the case.

      1. That totally make sense. I never really thought about this in details before. But 3.3% or 3.5% may do the job.

        Essentially, the goal is to reach a “threshold” where your returns on investments – over 5-10 years period – are always bigger than your expenses. The bigger the difference, the faster the investment portfolio will grow over time.

        I just found this article on Forbes that did the detailed analysis. And it seems that you are right. I put the link here in case you may be interested :

        In conclusion, my 3% rule might be overly conservative. I’ll have to think about this. Maybe review my plan.

        Thanks for the reply. Very helpful.

  4. Dividends are just one method of returning capital to a shareholder, whether said shareholder wants it or not. And it is a taxable event if not held in a tax advantaged account (IRA, 401k, HSA …). And on the ex-dividend date, the share price is reduced by the dividend, so you get nothing, but a tax bill. The treasury is looking for the tax windfall when the banks increase the dividends.

    I prefer share buybacks. That way I can control the taxable event.

    1. Try to buy food at the grocery store with your 1 share of VTSAX . CASH is king and the only legal tender accepted! Taxable or not, it’s cash and if you need it, than cash I want

      1. I’m with Jim here. I used to prefer capital gains when I was working because of the tax implications, but once I retired my preferences swung to yield because if you rely on capital gains too much in retirement, a bad year can force you to sell at a loss and create a sequence-of-returns risk.

        1. This is just a psychological trick but if it helps you, why not. You’re still selling when receiving a dividend just the same.

  5. I have been investing the indexed ETF’s recommended in the Investment Workshop for two years. The price of those ETF’s has gone up very much, ex. VUN.TO from $42 to $82. Is it still good to keep investing those ETF’s?

  6. My husband and I are in our 60s and he will be retiring soon; wish we had known about FIRE long ago.

    My question is about the effect of the QE ending on the US markets. When they have previously stopped QE and/or raised rates, the markets have gone way down. This makes us rather nervous about the QE ending right when retirement is looming at our ages.

    We’re wondering if we should sell soon?

    1. The Fed are trapped, they cannot raise rates to meaningful levels until they have devalued the currency sufficiently to inflate away the debt, since the debt-to-GDP levels are so high for both house holds and governments. But if they don’t hike, inflation is going to get away from them (some say it already has).

      If and when they do raise rates, at a certain point it’s going to break something in the financial system / or another black swan event happens to tank the markets -10 to 20%, at which turn they will be forced to fire up the money printer full brrrr again to prop up markets and govt spending. And off we go again to the races in full melt-up.

      An entire generation of boomers is relying on their portfolios to retire, Jpow isn’t going to let them down, otherwise the political ramifications would be disastrous. Jpow wants to inflate asset prices, so own assets – preferably hard ones. My 2 cents, good luck!

    2. Sell and go to what? Cash? And even if you did it successfully, you’d have to figure out when to get back in.

      Not even the Fed has a crystal ball, so trying to outguess the Fed is a losing game. If you want to mitigate your risk of a crash right as you retire, check out our Yield Shield series.

  7. I agree with you that dividend stocks are great when you’re close to retirement or retired, and for the people who still have a ways to go, it’s better IMO to focus on the capital gains potential of their portfolio holdings when evaluating investments.

    The energy and oil sector currently pays a healthy dividend these days. With all the wokeness around ESG and pension / hedge fund divestment away from investing more in hydro carbons, oil companies will be forced to stay disciplined and keep Capex low, and return free cash flow to shareholders in the form of both buybacks and dividends, as well as paying down debts. And you get the added bonus of owning equity in a commodity producer / hard assets that tends to increase in value during periods of secular inflation / stagflation. A win-win in my books.

    Big Tobacco is another sector that’s kept cheap and considered “uninvestable” by a lot of funds on ESG grounds. If you don’t care or are amoral about it, and are ok with mid single digit company growth over the next decade, a lot of them offer 5-8% dividend yields and are quite safe in terms of track records and payout ratios.

    Good luck everyone.

      1. Disagree. It’s part of the globalists’ Build Back Better agenda, for better or for worse. It will drive capital flows and fiscal / monetary policy over the next decade. Act accordingly.

    1. Energy, oil, and tobacco are all in the broader index, I don’t really see them being excluded for morality reasons.

      Personally, I’m totally fine with investing in Big Tobacco. If people want to empty their wallets to give themselves lung cancer, I am more than happy to put my bucket underneath that cash. The only reason I don’t specifically invest in tobacco companies is a) I’m not an individual stock investor and b) I don’t know the first thing about tobacco.

  8. This is great news. While I am a bit farther away from retirement, I do have a bit of my portfolio in dividend stocks just to have a little bit more variety.

    Was wondering for dividends, if we should be diversifying like we would for growth stocks, or is it mostly picking a few stocks with high yields and then splitting the investments between them?

  9. FINALLY someone to defy the FIRE belief that dividend investing is not for us. Of course it is and it is safer as you said. Of course some of them will cut dividends eventually but in general, just not having to sell shares ever it is very very reassuring. Nice one Vanderer.

    I wonder what JLCollins and the vast majority of the Capital gains only FIRE community will say about this post!

    1. I am definitely one of the more cautious voices in the FIRE community, and generally the other FIRE bloggers I know don’t necessarily disagree with our approach but do think we’re probably being over-cautious.

      I’m fine with that. Nobody’s retirement has ever failed from being too careful, right?

  10. If your analysis is dead on…
    I hope these companies with mountain of CASH invest for growth…
    instead of giving out dividends.

    Unless you are young and having the entrepreneur spirit…
    the only thing you can do with CASH is…
    spending it or AGAIN hoarding it as CASH.

    This is such a waste in CASH potentials.

    1. Spoken like a true engineer 🙂

      The companies sitting on huge cash balances are financials, insurance, utilities, etc. Not exactly companies known for their innovation…

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