By Scott Ronalds

Through the market’s ups and downs over the last few years, one area of stability has been dividends (for investors in Canadian stocks at least). With few exceptions, companies have maintained or increased their dividend payouts, providing investors with a steady stream of income. In fact, the income currently generated from a portfolio of dividend-paying stocks is often higher, and more tax-efficient, than what can be generated by holding government bonds – a rare occurrence by historical measures.

With the increasing focus on these securities, we have fielded a number of questions from investors over the last few months. What are the dividend yields of your funds? How much income do the funds generate? What happens with the dividends that the funds receive? Are they automatically re-invested in the same stock? How are they distributed to investors?

Dividend-paying stocks have always been an important component of our equity funds. While our managers do not invest exclusively in these securities, these equities typically comprise a large portion of our funds, given the attractive cash generating characteristics and strong balance sheets of many dividend-paying companies.

For reference, our Equity Fund holds 25 stocks, 22 of which pay a dividend. Our Global Equity Fund holds 38 stocks, 34 of which pay a dividend, and our Small-Cap Equity Fund holds 17 stocks, with 9 that pay a dividend. The equity portion of our Income Fund is comprised entirely of dividend-paying securities.

The dividend yields (pre-fee) of our funds are as follows (as of August 31):

• Equity Fund – 2.2%
  
• Global Equity Fund – 2.9%
  
• Small-Cap Equity Fund – 3.3%

The Equity Fund’s 2.2% yield means that for every $100,000 in assets, the fund receives $2,200 in dividend income on an annual basis. While investors do not “see” this income, it forms part of the fund’s working capital (net assets). The manager typically uses the income to purchase additional shares in existing holdings, but they may also add it to the fund’s cash reserve if they are not finding good value. In essence, this income serves as a source of capital that the manager can put to work (on behalf of unitholders) as they see fit.

The dividend income that the portfolio receives is reported to investors at the end of the year on a T3 slip and is attributed to unitholders in the fund’s annual distribution. As with all forms of income, dividends are taxable (if they are held in non-registered accounts). Note, however, that some of this income may be used to offset the fund’s operating expenses. If this is the case, the distribution and tax liability are reduced accordingly.

Investors and portfolio managers have been frustrated with stocks over the past few years. But those who own dividend-paying stocks and are tolerant enough to see their investment thesis play out are being paid for their patience. As Tom Petty put it, “the waiting is the hardest part.”