Reinvesting dividends is one of the keys to building wealth. However, one downside of redeploying my dividends manually is that I sometimes get caught taking an extended nap on the job.
Take the past few months, for example. Due to my own indolence – it’s summer, after all – I find myself sitting on $4,666.71 of cash in my model Yield Hog Dividend Growth Portfolio.
Astute readers will point out that enrolling my stocks in a dividend reinvestment plan (DRIP) would have prevented such an unseemly pile of cash from building up and earning me exactly jack squat – a phenomenon known in investing lingo as “cash drag.”
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But as much as I believe DRIPs are an excellent way to harness the power of compound growth, I still prefer the flexibility of being able to reinvest dividends when and how I want to, even if it means my cash balance occasionally swells to an unsightly degree.
Which brings us to the subject of this column. Today I’ll be unburdening myself of most of that legal tender, with roughly equal proportions allocated to the following three stocks.
Toronto-Dominion Bank (TD)
Price: $102.35
Yield: 4.1%
No need to overthink this one. The big Canadian banks have long been among the market’s top performers, reflecting their dominant positions in lending, investment banking and wealth management. For the 10 years through July 31, the Solactive Equal Weight Canadian Banks Index posted an annualized total return, including dividends, of 12.8 per cent, leaving the benchmark S&P/TSX Composite Index in the dust by a full three percentage points.
When the banks get knocked down – as they did during the 2008-09 financial crisis and the pandemic – they always get back up again. Witness Toronto-Dominion Bank’s rapid recovery since the stock was pummelled by the bank’s U.S. money-laundering fiasco last year. I won’t be taking a suitcase full of cash to my local TD branch today, but I will be adding 15 shares of TD to the model portfolio, for a total of 115.
Manulife Financial Corp. (MFC)
Price: $42
Yield: 4.2%
Buying good companies whose shares have suffered a setback is a time-honoured investing strategy. Manulife’s stock dropped earlier this month after the company reported quarterly earnings below analysts’ estimates, partly due to an elevated number of large claims in its U.S. life insurance business. But the miss likely reflected “normal claim volatility rather than an unfavourable mortality trend,” the company’s CFO said. In other words, people aren’t actually dying earlier and more often.
Manulife’s operations in Asia, meanwhile, continued to chug along, with core earnings climbing by double digits. Manulife’s shares offer an attractive yield of more than 4 per cent, and I expect the company will continue to hike its dividend for many years to come. For all of these reasons, I’ve added 35 shares of Manulife, bringing the total to 215 in the model portfolio.
Restaurant Brands International Inc. (QSR)
Price: $90.25
Yield: 3.8%
It’s one of Canada’s favourite summer road-trip traditions: stopping at Tim Hortons to use the restroom. While you’re there, might as well order a coffee and whatever grilled panini whatchamacallit they’re hawking this week. In the quarter ended June 30, same-store sales at Tims rose 3.4 per cent, pacing parent Restaurant Brands International – which also owns Burger King and Popeyes Louisiana Kitchen – to a system-wide sales increase of 5.3 per cent, including new restaurants.
Yet the stock fell as investors focused on Burger King’s disappointing U.S. same-store sales growth of 1.5 per cent, which reflected a weakening U.S. consumer. While I don’t pretend to be a technical analyst, it’s worth noting that Restaurant Brands’ stock has usually found support around current levels in recent years, which suggests that the downside from here may be limited. Regardless of what happens in the short term, I’m confident that Restaurant Brands’ sales, earnings and dividends will continue to rise, which is why I’m adding 15 shares to the model portfolio, for a total of 105.
Disclosure: The author personally owns shares of TD, MFC and QSR. Model portfolio purchases were executed at closing prices on Aug. 12.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.