A recent article in the online edition of The Economist highlighted the increasing time one can expect to spend in retirement nowadays versus even the relatively recent past. Canadian males who reach the “official” retirement age of 65 have an average life expectancy of a further 20 years.
The article foretells the resulting strain to pension plans in financing longevity far in excess of what was expected when the plans were set up. Those without official pension plans must also be concerned. Will our money last?
In a world of low interest rates, investors worry about how to finance retirement without taking undue risk. We think retirees should look to dividends from stocks to help finance their retirement. But, it’s not simply a matter of running your pen down a list and circling the stocks with the highest current yield. A major focus of ours is to analyze a company to determine if an attractive current yield is sustainable. The other mistake an investor can make is to omit from consideration good companies with a low current yield. Here’s an example:
Tim Hortons, iconic Canadian fast food retailer, is not generally regarded as a dividend play. Indeed, the dividend is quite modest, currently a 1.6% annual yield and well below the average TSX dividend yield of about 2.7%. But, the dividend has almost doubled since the company’s IPO in 2006. The dividend has been raised 3 times since, most recently this past month. Their new dividend policy is a 30%-35% targeted range of prior year normalized net earnings. The company plans to expand. In early March 2010, they announced plans for another 900 locations to open by 2013 (300 in the United States). To the extent that they meet their plans for expansion, and their financial targets, there is a great opportunity for the dividend payment to grow over time. Investors in Tim Hortons today, likely investing in the company for its growth potential, and its relative stability in a down market, could be clipping far higher dividend coupons many years hence. For a historical Canadian example, just ask those lucky Fortis investors, who have experienced dividend increases in 37 consecutive years.
As our “golden years” expand, more consideration must be given to strategies that reduce the possibility that we outlive our income. Dividend paying stocks, especially those positioned to increase dividends over time, deserve a place at the table.