A portfolio investment return is typically divided into two components: price appreciation of the underlying securities and distributions or dividends paid out to investors. Holding a group of securities with high dividend payout is beneficial, but it’s equally important for companies to have a consistent track record of maintaining or growing their dividends. In this article, we will provide an update on the North American dividend landscape, with a focus on Canadian companies. We will also explore the S&P/TSX Canadian Dividend Aristocrats Index, which aims to capture both sustainable dividends and capital appreciation - some of the key factors in investors’ total return expectations. The index is designed to offer diversification across all sectors and exhibits both growth and value characteristics.

2024 Dividend Update

Dividend announcements are on the up and up in 2024, with 14,146 quarterly dividends being rewarded to shareholders to-date (according to Wall Street Horizon’s worldwide database, data as of December 9, 2024). This is compared to the 13,885 announcements recorded by this point in 2023. Of those, 14% of dividend payouts were decreases from prior amounts, 28% were increases and 58% were unchanged.

When just looking at North American companies, the trend is similar, with 7,996 dividend announcements so far this year vs. 7,960 announcements at this point in 2023. Only 3% of those were decreases, 17% were increases and 80% of dividends were unchanged.

Canadian companies were the group that changed dividend payments the least. Year-to-date,1,662 dividends were announced by Canadian corporations, vs.1,653 announcements in 2023. Of those, 2% of those were decreases, 13% were increases and 85% of dividend payments were unchanged.

While the total number of dividend offerings has improved this year, the percentage of dividend payouts that showed monetary increases is less than the 7-year average in North America and Canada; worldwide payouts are in-line with the average over that time. Since 2018, 5% of North American dividend announcements were decreases from prior levels, 22% were increases and 73% were unchanged. Similarly, over the same period, 13% of Canadian dividend announcements were decreases, 23% were increases and 64% were unchanged.¹

¹Source: Unless otherwise noted, Wall Street Horizon data as of December 9, 2024.

Dividends payouts (along with share buybacks) are one of the primary vehicles that companies use to return value to shareholders. For this reason it is a positive sign to see an increase in the number of companies offering dividends in 2024 after many companies remained cautious last year in the face of higher interest rates, stubbornly elevated levels of inflation and the threat of an impending recession. Unsure of whether a soft-landing was in store for the US, companies held back on returning excess profits to investors. Dividends benefit investors by providing income, but also work as a gauge for the company’s financial well-being. For this reason, high dividend payers tend to be very in demand.  

Highlighting S&P/TSX Canadian Dividend Aristocrats Index

S&P/TSX Canadian Dividend Aristocrats Index (launched on August 1, 2008) is not a typical index that merely includes high dividend-yielding securities as of the latest period. Instead, it aims to include companies that have maintained or increased their dividends every year for at least five years. As a result, the index aims to focus not only on high-dividend-paying companies but also on those with a strong track record of stable or growing dividends, typically linked to robust earning power and sound management capabilities.  

Many dividend factor indices group companies by their current or trailing highest dividend yields, but this doesn’t necessarily indicate strong financials to support continued high payouts. Investors often chase high-yielding companies, which can lead to a “dividend trap,” where an attractive initial yield masks underlying financial instability and lower future profitability. This can result in both capital and income losses when the company fails to sustain its dividend payouts.

Performance in bear markets

 Compared to the S&P/TSX Composite Index, the S&P/TSX Canadian Dividend Aristocrats Index has outperformed the broad market index by nearly 5% over the past year (Exhibit 2). However, over a longer time horizon, its total return performance has slightly lagged behind the S&P/TSX Composite Index, with a 0.8% difference over five years. The S&P/TSX Dividend Aristocrats Index also demonstrates higher annualized risk over five- and ten-year periods. 

This can be partly attributed to its more concentrated nature, as it includes about 40% fewer constituents than the Composite Index and tends to have a bias toward large-cap firms, with a median market cap of $11.1 billion compared to $4.7 billion for the Composite Index.

The true strength of companies with sustainable dividend growth is most evident during periods of market turmoil. Exhibit 3 compares the returns of S&P/TSX Canadian Dividend Aristocrats Index with those of the S&P/TSX Composite Index during significant market downturns that affected not only the Canadian financial market but also the global economy. Aside from the global financial crisis and COVID-19, the S&P/TSX Dividend Aristocrats Index has outperformed in every major market drawdown, often by significant margins. Across six unique periods of drawdowns, the S&P/TSX Canadian Dividend Aristocrats Index provided an average excess return of 1.2% compared to the S&P/TSX Composite Index. This highlights the index’s ability to offer better downside protection during market downturns.

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