It has been over three months since everything first shut down due to the pandemic. We have now gone through an entire "COVID-impacted" quarter of dividend payouts (or lack thereof) since the depth of the market crash in mid March. This seems like a good time to reflect upon the economic fallout of COVID 19 and its financial impact on our portfolio.
My husband Rich and I have been through market downturns before, including the financial crisis of 2008. That situation was less stressful for us since we were both still working and had time to wait for a recovery. In fact, that recession was a great time for us to buy stock at a discount and probably hastened our ability to retire when we did. We saw it as a successful test of our retirement strategy of basing our income on dividends as opposed to the value of the stock. Although stock prices plummeted, our dividends held strong. It helped that only limited sectors were affected and for the most part, these were not sectors that we were heavily invested in. Also since we limit the size of our holdings in any one company, we would be only slightly impacted by any company that did cut or eliminate its dividend. In addition, it proved that we had the risk-tolerance and fortitude to concentrate on the dividends and not panic even while the total value of our portfolio fell drastically. We were tested again in 2015 when the markets fell 11% from the previous year for various reasons including worry over China's economy and its impact on the rest of the world. That time we were 3 years into retirement. But once again we stood pat, our dividends held, and by 2016 we had recovered all of our "paper" losses and were on the rise again.
This time we did not escape unscathed. Six of the companies that we own have either slashed or totally eliminated their dividend payouts. We already knew about a couple of these from the last quarter. They included Cineplex (CGX - more on this later) who understandably stopped payments since they were not making any revenue with their theatres closed, and Chemtrade (CHE.UN), an already struggling company who cut their dividend by 50%. Husky Oil (HSE) was another troubled company that was on our radar for the potential of a dividend reduction. Rather than totally eliminating it, Husky cut their dividend by 90%, now paying out just 10% of what it used to for the past 1.5 years. In my opinion, leaving just 10% of your previous payout is a weak attempt at being able to claim that you are still a dividend-paying stock. I closely track our dividend payouts each month and this measly amount is almost not worth my time to log. However Rich thinks that it is an indication that the company hopes to resurrect a healthier dividend once their finances improve. Methanex (MX), a producer of Methanol which has been affected by weak oil prices, used the same tactic by cutting their dividend by 90%.
A&W Revenue Royalty Income Fund (AW.UN) took the opposite approach by totally eliminating their dividend payout, but declaring up front that this is a "temporary measure" while its restaurant chains closed at the start of the pandemic. Now that the restaurants are starting to reopen again, hopefully this means that eventually the dividend will return. Suncor (SU) was the most interesting case, since they actually raised their dividend by 10% back in the first quarter and then clawed it back before cutting its dividend by 50%. So the net result is that Suncor has cut its dividend by the unusual amount of 55% since their previous payout.
The impact of these dividend reductions was tempered by the fact that 5/6 of them were situated in our registered accounts. Having already made the bulk of our annual LIF and RRIF withdrawals at the beginning of this year, we can now defer next year's mandatory withdrawals up to the end of 2021, which gives us over a year and a half to wait for these companies to recover both in value and dividend payouts. For the past few years, we have been making our RRIF/LIF withdrawals by moving stock-in-kind into our non-registered account, from which we withdraw the dividends to spend as income. We usually move the more stable stocks, leaving companies in riskier or more cyclical sectors in the registered accounts. This worked out especially well this year, since none of the stock that we withdrew cut their dividends. Because of our strategy of moving stock-in-kind as opposed to selling stock and withdrawing cash, it would have actually been better had we made the withdrawals during the lowest point of the market. For the same amount of taxable income generated from the withdrawal, we could have moved more dividend-paying shares to the non-registered account at a lower share price. But who could have predicted this latest market downturn?
The one dividend cut that directly impacted our annual income was Cineplex, which we hold both in our registered and non-registered account. Cineplex had been a solid dividend-paying company that increased their payout annually since 2011, even though their share price had declined since we first bought it. Things looked bright for this stock when it was announced at the end of 2019 that the company would be bought out by British company Cineworld for the price of $34 per share. With that announcement, the market price of Cineplex shot up by over $10 to match and even momentarily slightly exceed the buyout price. At that point, we considered cashing out our Cineplex shares in advance of the sale. But inertia and the desire to continue reaping the seemingly solid dividend payout for a few more months led to us hanging on to the shares until the sale. Then COVID 19 hit, Cineplex closed all their theatres, their share price plummeted, they eliminated their dividend payment and now Cineworld has backed out of the buyout deal. The lost opportunity of selling our Cineplex shares and the loss of dividend income that those shares provided is regrettable, but our diverse portfolio is structured so that no one company's misfortunes will hurt us too badly. There is no point to sell now at these depressed prices, especially since theatres are starting to reopen. We will just continue to hold our Cineplex shares and hope for a rebound, while we watch the unfolding drama as the company sues Cineworld for breach of contract.
During all this, there were two anomalies that made it look like two solid companies had reduced their dividends, but did not. First Telus (T) initiated a 2-for-1 stock split, making it seem on the surface as if their dividend was cut in half. In reality, we ended up with twice the number of shares at half the dividend rate and came out even. Brookfield Infrastructure Partners (BIP.UN) made an even more complicated move when they split off a small portion of their company to create Brookfield Infrastructure Corp (BIPC). For every 9 shares of BIP.UN, we received 1 share of BIPC and the dividend for both companies adjusted accordingly. It took a bit of math to prove to myself that we came out with the same payouts between the two companies that we originally had with just BIP.UN, but we did. One interesting thing to note is that unlike BIP.UN, BIPC is not an income trust, so eventually we could move shares of this company from our registered to our non-registered account without generating tax complications that come with holding income trusts in non-registered accounts.
So what has been the net effect on our portfolio and our dividend income after 3.5 months of the pandemic? As indicated in my previous blog post, 19 of our 46 companies had raised their dividends in the first quarter, with Suncor being the only one that subsequently cut it in the second quarter. This means that despite the cuts that we received, so far our overall annual dividend income is higher than it was at the end of last year. The pandemic is far from over yet, but the worst of the market roil seems to hopefully be over? If that turns out to be the case, then we will have survived the "mother of all" market downturns and it feels like if we can make it through this with our income relatively intact, then we can survive anything. With stock prices still depressed relative to before COVID 19 struck, we continue to use Dividend Reinvestment Plan (DRIP) in our registered accounts to purchase more stock from the companies whose holdings we wish to grow.
Because so many activities have been inaccessible or undesirable to us over the past three months, our spending continues to be concentrated mainly on mandatory costs such as condo fees, utilities, household supplies and groceries. During this period, we totally eliminated our usual spending on transit, hair cuts, dental appointments, discretionary shopping trips, and entertainment activities such as going to the theatre or movies and dining out at restaurants. We have no plans for vacation spending for the rest of the year and have drastically reduced our driving costs. For the first time since we retired, we have actually been able to add regularly to our emergency kitty funds stored in our high-interest savings accounts. In the months of April and May, our average spending was almost 50% less than in previous years. Now part of that was because we were also not charged property tax for two months and are paying a temporarily reduced utility rate on our hydro usage. In June, as the property tax bills restarted and more restaurants opened up for takeout, our relative savings dropped by around 25% which is probably a more realistic rate going forward.
As described in my book Retired At 48 - One Couple's Journey to a Pensionless Retirement, we use Quicken both to accurately categorize our spending for ease of running reports, but also to predict up-coming spending needs to ensure that we always have enough cash flow, either coming from our dividends or augmented from our short or long term kitties. So when our monthly property tax was deferred for two months, I post-dated the expenses in Quicken to remind myself that this money would come due eventually.
All in all, Rich and I have been quite fortunate throughout the pandemic since we were already retired and did not have jobs to lose or stress over, and our retirement income has so far held up quite well. I read an article in the Globe and Mail back in March about ways that people who were financially secure could help out the economy. We have implemented some of these ideas including regularly ordering takeout from our local restaurants and going to pick up the food so that delivery services do not eat into the profits, buying gift cards for future spending, donating to charities including the Red Cross, and accepting credits from theatres for future shows instead of getting refunds for cancelled performances. One interesting suggestion that helps the economy in general is to file and pay your income taxes early. We did this for our 2019 tax filings, paying at the beginning of May instead of taking advantage of the deferred payment deadline of September 1. Since Rich needs to make another small RRIF withdrawal to reach his annual RRIF minimum, he may opt to pay more withholding tax than would normally be required, as a way to reduce the tax owed in 2020 and also continue to help replenish the government coffers. I realize that our small contributions won't do much if anything to address the overwhelming deficit that is being racked up during the pandemic, but hopefully every little bit helps?
