How To

The 4 Budgets of Retirement: How to Spend Confidently at Every Stage

Most Canadians understand the importance of having a budget while saving for retirement—but few realize just how critical budgeting becomes after you retire.

While your working years are about maximizing savings and staying invested, retirement introduces a new challenge: spending wisely without outliving your money.

One of the most common questions from retirees is:
“How do I protect my portfolio against a market correction?”

While you can’t control the markets, you can control how much you withdraw and when. And that starts with a retirement budget tailored to each phase of your journey.

The Four Phases of Retirement

Just like your working life has seasons, so does your retirement. These four stages—Before You Go, Go-Go, Slow-Go, and No-Go—help define your spending needs and investment strategy over time.

Planning with these stages in mind enables you to build an agile retirement budget that grows, flexes, and contracts as needed—while keeping your long-term financial health intact.

1. Before you Go: The Accumulation Years

This is the “pre-retirement” phase, which often lasts longer than retirement itself. It’s the period when you’re actively saving, investing, and preparing for what lies ahead.

The most important principle here?
Pay yourself first. Systematic investing—through your RRSP, TFSA, or pension—is the cornerstone of a secure retirement.

But don’t stop there. This is also the time to envision the kind of retirement you want:

Will you travel regularly?
Do you want to help your children financially?
Will you buy a vacation home or downsize?

These answers will shape your savings targets and retirement age. The earlier you plan, the more flexibility you’ll have later.

Tips for this phase:

Use tools like a Projection Spreadsheet to explore different scenarios.
Adjust contributions between RRSPs, TFSAs, and other accounts based on your income and pension entitlements.
Stick with a consistent investing strategy that suits your goals and risk tolerance.

From GICs to REITs: A Complete Guide to Retirement Income in Canada

Canadian Retirees Guide to Income-Producing Investments Cover.

This free guide reviews 20 income-focused products. In the one-page summaries, we highlight the pros and cons, common mistakes to avoid, and who should use them.

We also created a rating system to highlight the difference between each product. The idea is to provide you with as much information as possible so you can make the right choice for your situation.

While there is no free lunch in finance, there are multiple ways to reach your retirement goals.

Download the Complete Guide to Retirement Income Products to discover which fits your retirement phase best.

2. Go-Go Years: The Fun Phase

The moment you retire, you enter the “Go-Go” phase. You’ve worked hard, saved diligently—and now it’s time to enjoy the rewards. For many Canadians, this phase lasts from their early 60s to around age 75.

Picture of a retired couple walking on the beach.

This is when you’ll likely:

Travel more
Make larger discretionary purchases
Renovate your home or relocate
Spend on family or hobbies

However, this phase also presents a new challenge: shifting from saving to spending. Many retirees feel anxious about drawing down their portfolio.

That’s why having a flexible budget is key. You’ll want:

A base budget for regular expenses (housing, food, utilities)
A variable budget for travel, new cars, and other big-ticket items

Tips for the Go-Go years:

Reassess your plan annually: simulate “retiring now” each year to update your 12-month budget based on portfolio performance.
Postpone large purchases in down markets and increase spending during up years.
Use advanced budget tools to account for one-time gifts or lifestyle upgrades.

3. Slow-Go Years: Steady as It Goes

As you move into your mid-to-late 70s, travel slows down, energy levels shift, and your budget changes again.

While you’ll spend less on big adventures, your base expenses may stay the same—and some costs (like health care or home maintenance) could increase.

You might also want to adapt your home for aging-in-place or plan for more frequent medical appointments or services.

Tips for the Slow-Go phase:

Don’t reduce your budget too aggressively; changes should be gradual.
Consider future-proofing your home for mobility and comfort.
Explore downsizing or selling assets to unlock cash if needed.

4. No-Go Years: Health First, Finances Second

This final phase typically begins in your 80s or later, when cognitive or physical health changes become more significant. You may spend more time at home, require assisted living, or home care.

At this point, your budget shifts to reflect increasing healthcare needs, estate planning, and support services. You’ll have a reliable income stream if you’ve built a strong foundation with defined benefit pensions, CPP, OAS, or annuities.

If your strategy included gradually drawing down your portfolio or even “dying with zero,” this is the time to ensure you’ve preserved enough flexibility.

Tips for the No-Go phase:

Be cautious with plans to spend aggressively in earlier phases; longevity risk is real.
Keep a home as a backup asset, or ensure stable income from guaranteed sources.
Review estate plans and consider early inheritance options or charitable giving if desired.

Final Thoughts: Plan Long, Adjust Yearly

Planning for retirement is much like planning a long road trip. You need a map for the big picture, but you’ll also need to reassess regularly, adjusting for weather, detours, and unexpected stops along the way.

One of the best habits you can develop is to “retire each year.” That means checking in annually with your budget, income, and lifestyle expectations. That way, you’re not just reacting to market corrections—you’re steering your retirement journey with confidence.

Ready to build a retirement income plan that fits your lifestyle?

From simple GIC ladders to advanced income strategies, the Canadian Retirees’ Guide to Income-Producing Investments covers 20 income-generating products with pros, cons, and tax insights for each.

👉 Get your free copy of the complete guide now and take the guesswork out of retirement planning.

2 Income Products for Your Retirement

One of the biggest challenges when planning for retirement is creating a dependable income stream that balances safety, flexibility, and long-term growth.

Fortunately, Canadian investors have access to a variety of income-generating strategies. This post explores two proven approaches: Laddered Bond ETFs & GIC Ladders and Dividend Stocks.

Each serves a distinct role in a well-diversified retirement portfolio.

Remember, they are just two of 20 retirement income products I analyzed in a comprehensive guide. The guide categorizes each option by complexity and suitability for retirees.

Whether you’re in the Go-Go, Slow-Go, or No-Go phase, this guide can help you find the right income solution.

Download the Guide Now to Get a Review of 20 Income Products

Laddered Bond ETFs & GIC Ladders

What Are They?

A laddered bond ETF is a fund that invests in a series of bonds with staggered maturity dates, typically across 1 to 5 years. As bonds mature, proceeds are reinvested automatically, maintaining a balanced maturity ladder.

Similarly, a GIC ladder involves purchasing Guaranteed Investment Certificates with staggered maturities—often one yearly from 1 to 5 years. As each GIC matures, the capital and interest are rolled into a new 5-year term, preserving the ladder structure.

How do They Generate Income?

Both products earn income through regular interest payments. The principal can be reinvested or withdrawn upon maturity, depending on your needs. Bond ETFs offer more liquidity, as they can be sold anytime, while GICs are typically locked in unless you choose redeemable options.

Pros

Balance between income and capital preservation.
Laddering smooths out interest rate risk.
GICs are CDIC-insured (within limits) for added protection.

Cons

GICs may be locked in and non-redeemable.
Bond ETFs are exposed to market risk and may lose value if rates rise.
Interest income is tax-inefficient in non-registered accounts.

Tax Considerations

Interest income is fully taxable. To minimize the tax impact, it is best held within tax-sheltered accounts such as TFSAs or RRSPs.

Who Is It Best For?

This strategy is ideal for retirees in the Slow-Go or No-Go phase who prioritize predictable income and capital protection. GICs appeal to those seeking safety, while bond ETFs offer liquidity and flexibility for those following a systematic withdrawal plan.

Common Mistakes to Avoid

Choosing long-term GICs without understanding redemption terms.
Assuming bond ETFs are “risk-free” like GICs.
Failing to reinvest matured capital, weakening the laddering effect.

From GICs to REITs: A Complete Guide to Retirement Income in Canada

This free guide reviews 20 income-focused products. In the one-page summaries, we highlight the pros and cons, common mistakes to avoid, and who should use them.

We also created a rating system to highlight the difference between each product. The idea is to provide you with as much information as possible so you can make the right choice for your situation.

While there is no free lunch in finance, there are multiple ways to reach your retirement goals.

Download the Complete Guide to Retirement Income Products to discover which fits your retirement phase best.

Dividend Stocks

What Are They?

Dividend stocks are shares of companies that distribute part of their profits as dividends—often quarterly or monthly. Canadian dividend-paying stocks with consistent dividend increases signal strong fundamentals, reliable cash flow, and prudent management.

Understand how to find the most reliable dividend stocks by reading about the dividend triangle.

How do They Generate Income?

Dividend payments offer a recurring source of income. Investors may take the dividends in cash or reinvest them for compounding growth. A well-constructed dividend portfolio can deliver monthly or quarterly income with potential for annual increases.

Pros

Tax-efficient income thanks to the Canadian dividend tax credit.
Potential for dividend and capital growth over time.
Helps offset inflation through dividend increases.

Cons

Dividends are not guaranteed—cuts can occur in downturns.
Subject to market volatility.
Requires time, interest, and some financial knowledge to manage effectively.

Tax Considerations

Eligible Canadian dividends are taxed at a lower rate than interest income in non-registered accounts, making dividend stocks a strong candidate for taxable portfolios.

Who Is It Best For?

Dividend stocks are best suited for retirees in the Go-Go or Slow-Go phases who are comfortable with market exposure. This approach rewards those seeking rising income and portfolio growth. Even novice investors can manage this strategy effectively with tools, newsletters, or professional support.

Common Mistakes to Avoid

Chasing high yields without assessing dividend safety.
Overconcentration in one sector (e.g., banks, energy).
Ignoring stock valuation when buying.

We have covered some other income products in the Dividend Guy Blog podcast episode below.

Final Thoughts: A Solution for All Retirement Seasons

Both laddered bond strategies and dividend stocks can play an essential role in your retirement plan.

Bond ladders provide stability and predictable cash flow, while dividend stocks offer growth potential and tax advantages. Choosing between them—or using a mix of both—depends on your comfort with risk, need for liquidity, and long-term income goals.

By understanding the trade-offs and aligning them with your retirement phase, you can build a resilient portfolio that supports your lifestyle—through all seasons of retirement.

Ready to build a retirement income plan that fits your lifestyle?

From simple GIC ladders to advanced income strategies, the Canadian Retirees’ Guide to Income-Producing Investments covers 20 income-generating products with pros, cons, and tax insights for each.

👉 Get your free copy of the complete guide now and take the guesswork out of retirement planning.

Building an Income Portfolio Made Easy

“What if your dividend income was more than just a yield?”

We all dream of the same thing: freedom.

Whether that’s retiring comfortably, spending more time with family, or finally ticking off that epic trip to Tuscany — the goal is simple: build income that works for you, not the other way around.

But here’s the problem: Most people start their income journey with the wrong question:

“How much yield can I get?”

While it sounds like a smart starting point, this approach is more of a napkin calculation than a real investment plan. It sets you up to chase yield, walk into value traps, and — worst of all — risk your retirement income.

So let me walk you through a better way to build an income portfolio that’s built to last.

The Shift: From Yield Chasing to Dividend Growth Conviction

Let’s kill a myth right now: High yield does not equal high income security.

Just because a stock pays 7% doesn’t mean it deserves a place in your portfolio. High-yield stocks are often the market’s way of warning you — not rewarding you.

We’ve seen this movie before: A company offers a juicy dividend, everyone piles in… then the earnings drop, the dividend gets slashed, and suddenly you’ve lost both your income and your capital. That’s not income investing — that’s gambling dressed up as a paycheck.

Instead, I focus on dividend growers. These are companies that:

Grow their revenue (top-line strength)
Grow their earnings (bottom-line power)
And grow their dividend (shareholder commitment)

This is what we call the Dividend Triangle — and it’s the first thing I look for when building an income portfolio.

But let’s go one step deeper:
For retirees, dividend growth is what protects their lifestyle.

Here’s why:

🔒 It protects you from inflation.
Prices rise every year — groceries, gas, healthcare. A company that increases its dividend annually ensures your income keeps pace.
⏳ It guards against longevity risk.
You may live 25–30 years in retirement. If your income stays flat, your purchasing power will fall dramatically.
🛡️ It reflects a strong business model.
Companies that grow their dividend can only do so by increasing their profits and cash flow — year after year. This is your best defense against surprises.

“A 3% yield growing at 8% per year will beat a 6% yield that never grows — and do it with less risk.”

Imagine this:

You retire with a $1 million portfolio. You choose stable dividend growers paying an average of 3.5%, with a dividend growth rate of 7%. In 10 years, your income will nearly double — without you lifting a finger.

Now compare that to locking in a 6% yield with no growth. Ten years later, your income hasn’t changed — but your costs have. You’re forced to sell shares to keep up, and that’s where the retirement stress kicks in.

Dividend growth isn’t just about returns — it’s about peace of mind.

If this approach resonates with you — focusing on dividend growth instead of just chasing yield — you’ll want to dig deeper into the system I use to build reliable, inflation-resistant income streams.

From Theory to Action

That’s exactly why I created the Dividend Income for Life Guide. It breaks down the step-by-step process for building your dividend pension plan — no guesswork, no spreadsheets required.

Inside the guide, you’ll learn how to:

✅ Build a portfolio that generates growing income in retirement
✅ Apply the Dividend Triangle to select stronger companies
✅ Avoid common traps like over-diversification and yield chasing

📘 Ready to go from theory to action? Download the guide and start designing the income stream you’ll rely on for decades:

Start With This Core Strategy

If you’re new to building a dividend portfolio, here’s a simple formula I’d suggest using as your foundation:

1. Define Your Target Yield

Aim for a total portfolio yield of ~3–4%
This lets you combine lower-yielding growers with stable income generators

🔥 Pro Tip: It’s not about finding one perfect stock — it’s about building a team that works together.

2. Mix Yield with Growth

Create a blend like this:

Low yield, high growth: Apple, Visa, Couche-Tard
Moderate yield, consistent growth: Johnson & Johnson, BIP
High yield, low growth (if safe!): Selected REITs or utilities

If you can access a Stock Screener, use the Chowder Rule (Yield + 5yr Dividend Growth ≥ 9%) to screen your picks.

Sector Allocation: Balance for All Seasons

No single sector is recession-proof, but some bend instead of breaking.

There are 11 sectors that we can sort into three categories:

Income/stability: Sectors where you find many mature businesses that are recession-resistant.
Growth: Sectors where you find companies with multiple growth vectors, able to surge during economic booms.
Both: Sectors where you find companies balancing growth and stability.

Income/Stability Sectors	Growth Sectors	Sectors Balancing Both
Consumer Staples	Consumer Discretionary	Financials
REITs	Information Technology	Communication Services
Healthcare	Energy	Industrials
Utilities	Materials

Do I need to invest in all 11 sectors?

Not at all. You must invest in sectors that fit with your goals, i.e., stability vs growth, and that you understand.

There’s no point in investing in tech stocks if you have no clue how the semiconductor industry cycles work. You won’t be happy when investments are down, but if you understand the industry’s characteristics, you won’t panic.

How much to put in each sector?

⚠️ Pro Tip: Keep any one sector below 20–25% to reduce risk.

Again, there are no hard rules here. I like to have a maximum of 20% invested in my favorite sectors and around 10% in others. However, I sometimes go above 20% due to the great performance of a few companies.

I invest in various industries within the same sector to avoid being impacted by a single market event.

For example, there is a big difference between:

Having 25% invested in financial services spread across five Canadian Banks, with 5% in each one.
Having 5% in each of the following: Royal Bank (Canadian bank), BlackRock (asset management), Visa (payment processor), Great-West Life (life insurance), and Brookfield Corp (alternative asset management).

Number of stocks per sector?

That depends on how many stocks you want to hold and how many sectors you want to invest in.

You can select the best 2, 3, or 4 companies in each sector you want exposure to. That would likely lead to a portfolio of 20 to 40 stocks. Purely by chance, that’s very close to what I think is the ideal number of stocks.

Number of stocks in my portfolio?

Holding fewer than 20 stocks means the room for error is thin. This strategy could be great for high-conviction investors, but I prefer securing a bit more diversification.

Conversely, if you go above 40, you’re getting closer to building your own ETF. Monitoring 70 companies quarterly will prove daunting, and you’ll eventually miss information.

Also, if a stock represents 0.32% of your portfolio, even if it doubles in value or crashes by 80%, you will never feel it.

Dividend Income = Your Personal Pension Plan

If you’re retired — or planning to be — think of your dividend portfolio as a self-built pension plan.

Each dividend-paying stock you own is like a brick in your retirement income wall. And just like any wall, some bricks are stronger than others.

Companies that grow their dividends year after year are the reinforced bricks. They strengthen your income over time and help it keep up with inflation. On the other hand, high-yield stocks that don’t grow — or worse, cut their dividends — are like hollow bricks. They may look solid, but when pressure builds (like inflation or a market downturn), they crack.

This is why dividend growth matters more than yield. It’s not just about getting paid today — it’s about getting more income every year, without selling shares.

Think of dividend growth stocks as inflation-adjusted paycheques — just like a pension, but one you control.

Again, if your portfolio yields 3.5% today, and your holdings grow their dividends by 6–8% annually, your income will double roughly every 9–12 years. That’s the income security most traditional pensions can’t even match.

Bottom line: A strong dividend portfolio is built one solid, growing company at a time. Focus on quality. Focus on growth. And watch your income become as reliable — and rising — as a pension.

The Traps to Avoid

Now that you’ve got the building blocks of a strong dividend income portfolio, it’s just as important to know what not to do. Even the best strategy can fall apart if you let fear, noise, or impatience take the wheel.

Here are three common traps I see investors fall into — and how to avoid them:

Chasing High Yield
If it looks too good to be true… it probably is. Many of the worst dividend cuts started with “safe” 6%+ yields. Always check the dividend triangle before reaching for yield.
Over-diversification
Owning 50+ stocks doesn’t make you diversified — it just makes you tired. Stick to 20–40 quality holdings across sectors you understand and can monitor.
Waiting for a Pullback
Time in the market > timing the market. Invest when the company’s fundamentals support your thesis — not when CNBC says “buy.”

Final Thoughts: Income That Grows With You

Instead of asking:

“How much income can I generate today?”

Start asking:

“How much income can I grow over the next 10, 20, or 30 years?”

That’s the mindset that builds wealth and protects your retirement.

Start with dividend growers. Build a balanced portfolio. Stay consistent. Let time do its thing.

Ready to Begin?

If you’re not sure where to start, here’s your mini checklist:

✅ Review your current holdings: strong dividend triangle?
✅ Identify your sector gaps
✅ Set a yield-growth blend target

And remember — you’re not alone. We’re building dividend income for life, one stock at a time.

Want a complete roadmap to get started? Download the Dividend Income for Life Guide — it’s packed with real-world insights, simple strategies, and the exact framework we use to help thousands of investors retire with confidence.

This guide will help you:

✅ Build a reliable income stream — even during market volatility
✅ Avoid costly mistakes (like chasing yield or holding forever)
✅ Invest with clarity, not guesswork

Start building your retirement income plan today:

And remember — you’re not alone. We’re building dividend income for life, one stock at a time.

Should you Use Profit Protection Measures?

Profit protection measures are ways in which investors sell their shares to safeguard existing profits, or to limit potential losses. How do investors do that? While protecting profits and limiting losses sounds like a wise thing to do, is it?

Profit protection is also known as profit preservation or risk management. Two ways of implementing profit protection are to set a profit cap at which you sell holdings and to use stop-sell orders.

Protect your retirement by making your portfolio recession-proof. Learn how in our free workbook. Download it now!

Profit cap rule

Some investors adopt rules for selling shares. For example, if they’re up 50% on a stock, they sell it. They are putting a cap on their profits, perhaps sometimes thinking that they got lucky and just want to run with a bag of money.

If you’re an active trader and you keep on buying and selling all the time, maybe this type of rule can be part of your strategy.

I prefer to let my winners run so I don’t set rules like this to protect my profit. Over the past 20 years, I found that it’s worth holding on to your great picks—those companies that you were so right about buying. Letting them run 5, 10, 15 years, can create so much profit…300%, 400% sometimes even over 1000%!

Since my focus is on dividend growth, I have 90-95% of my portfolio invested in dividend-growing companies, which I plan on holding for a long time.

Stop-sell orders

Another mechanism investors use for profit protection is to set up stop-sell orders. Imagine you bought shares at $50, and they are now trading at $100. Perhaps you’re thinking “Wow! I’m making a 100% return on this one. That’s crazy. But I don’t want to sell it because, well, what if it keeps going up? On the other hand, if it starts falling, I don’t want to lose all that profit.”

You could put in a stop-sell order that is triggered at $75.00; if the stock goes down to this price, your order becomes active or open, shares are sold, and you cashed in on some of the profit.

My use of profit protection

I don’t adopt profit protection measures very often. As I said earlier, 90-95% of my portfolio are dividend growers that I want to hold for a long time without capping my profit. I believe that if my portfolio’s sector allocation is in good shape, that my holdings are well diversified across industries, that I picked the best of class, and I monitor their results and trends every quarter, I am protected.

However, for the remaining 5-10% of my portfolio, I like the occasional speculative plays, especially when there’s a lot of volatility in the market like in 2020 for example, where I could see opportunities. I never exceed 10% of my portfolio in speculative plays and limit them to three or four positions. With these speculative plays, I do sometimes use stop-sell orders to protect my profit.

Something else that I do that relates to profit protection is to trim winning positions that are weighing too much in my portfolio.

My limit for any single position in my portfolio is 10%; that’s an arbitrary limit. Yes, I like to let my winners run, but I don’t want to wake up one day having 25% of all my investments in a single stock, even if it is a winner. After all, you can never be 100% about any stock, and certainly not about any company being able to thrive forever; competition changes, the economy changes, and consumer behavior changes.

For these reasons, I decided that I didn’t want to lose more than that 10% exposure on a specific stock and that whenever that 10% was exceeded, I would sell part of it automatically to bring the position back below or at my limit.

Protect your portfolio, make it recession-proof. Learn how in our free workbook. Download it now!

Is profit protection worth doing?

I think the value of profit protection has a lot to do with your strategy. If you’re an active trader or an investor who makes a lot of speculative plays, then yes, profit protection can play a role in your strategy.

While I do occasionally use stop-sell orders for my limited speculative plays, I don’t systematically implement profit protection measures. I prefer to protect my portfolio by trimming overweight positions rather than cashing in all my profit.

In the end, though, it still comes down to selling at a profit to protect against the impact of a potential loss by limiting a portion of the profit you make on a winning stock.

Quarterly Review of Your Stocks Made Easy

Quarterly review of your stocks made easy! That’s what I aim to do in this post. Reviewing your holdings’ quarterly results and your reasons for holding each stock to begin with are essential. It makes you confident that you have a resilient portfolio that suits your needs and that protects your retirement.

Finding the information

You’ll find most of the information you need in the companies’ quarterly results press releases. You can also look at their quarterly reports, management discussion and analysis (MD&A), and filing documents. Go to each company’s website, in the Investor Relations section. Dividend Stocks Rock members get links to the press releases in their quarterly reports and see trends for many metrics on stock cards.

Create a recession-proof portfolio and secure your retirement. Download our free workbook!

Trends and anomalies

Graphs showing an emerging trend of growth for revenue and EPS. — The trend is your friend

Reviewing results isn’t simply checking that sales and profits grew compared to last year. You must also look at the trends, i.e. the evolution of revenue, profit, dividend, etc., over time to see whether the company consistently succeeds. The trend is your friend. Also, when results show something unusual, going against the trend, investigate.

For example, you see a sharp drop in sales for a company that has increased its sales every quarter over five years. Do you panic and sell the stock? No, you investigate to see if it’s a temporary setback. Maybe the company had to shut down production when a storm damaged its facility or a ship stuck in the Suez Canal led to a shortage of raw materials.

Revenue growth

In the most recent quarterly results, look for the company’s revenue or sales. Revenue includes money made from sales and other sources, such as investment income.

1 – Compare the revenue number with the comparable period, also called the year-ago period. This is the same period of the year but a year ago. If you’re looking at Q2 revenue, compare it with Q2 revenue from a year ago.

2 – Has the revenue grown, is it flat with last year’s, or has it decreased? By how much in percentage?

Generally, 1% isn’t much, single-digit growth or decline is moderate, while double-digit growth (10% and more) is solid. Of course, that varies across industries and companies; 10% growth in a quarter for a company will disappoint if it had been growing its sales by 20% every quarter for two years.

3 – Look at the company’s quarterly revenue trend over five years. Does the trend show growth over five years? It is steady growth or accelerating? Is the trend showing a decline?

Is the most recent revenue figure within the trend or is it unusually good or bad? If it’s unusual, investigate the cause. The press release often explains exceptional conditions or one-time events that caused an anomaly.

Profit Growth

You also compare the company’s profit with that of the prior-year period. The profit is called net income or net earnings. The easiest metric to use for profits is the Earnings per Share (EPS) metric. EPS is a metric that divides the company profits by the number of shares.

One-time or unusually large expenses, for example, a lawsuit settlement or a product recall, affect EPS. Companies often provide another metric called the Adjusted EPS (or normalized) that excludes such unusual items to provide a value that is more comparable to that from the prior-year period.

1 – Observe whether the EPS (or Adjusted EPS) has grown, is flat, or has decreased, and by how much in percentage.

2 – Look at the EPS trend over five years. Is the company growing its profits, is it stagnating, or in decline? Is EPS growth or decline steady or accelerating?

Accelerating growth hints at a thriving company that executes well while an accelerating decline is a problem.

3 – Are the most recent EPS within the trend or unusual? For unusual EPS, investigate.

If there was a sharp sales drop, EPS falling is not surprising. If EPS falls more than sales or falls while sales increase, perhaps the company costs have risen due to inflation, shortages, etc. Maybe the company lowered its prices to customers to drive up sales, reducing profit margins at the same time.

For some industries with large amounts of depreciation, such as utilities and REITs, EPS can be misleading. Other metrics such as distributable cash flow (DCF) per share or funds from operations (FFO) per share are more appropriate.

Dividend Growth and Safety

Compare the most recent dividend amount paid or announced with the dividend paid in the previous sequential quarter, i.e., when looking at the Q3 dividend, compare it to Q2 rather than Q3 of the previous year.

1 – Has the dividend increased? Is it the same? Was it cut? I usually don’t hold on to companies that cut their dividends.

2 – If there wasn’t a dividend increase, look at the dividends paid over the last 12 months; was there an increase in the last year? A yearly dividend is a minimum for a dividend growth investor.

3 – How much was the dividend increase in percentage? Does it at least match inflation? Companies that don’t consistently match or exceed inflation don’t protect your income in the future.

4 – Look at the dividend trend over five years. Is there yearly growth? Is growth accelerating, steady, or slowing down? Often, dividend growth that slows down is the first sign of a dividend cut in the future.

5 – Look at the company’s payout ratio. This ratio identifies how much of the profits the company pays out in dividends. We all want generous dividends, but if a company pays more than it earns, that’s not sustainable. Compare the latest payout ratio with the payout ratio trend over five years to see whether it is normal for this company, higher or lower. You might also want to look at the cash payout ratio; for some industries, you should look at other payout ratios that are more appropriate.

6 – Look at the company’s cash from operations amount and see the five-year trend. Companies that generate increasing amounts of cash from operations are in a good position to keep paying and increasing their dividends.

We’re here to help! Download our free recession-proof portfolio workbook!

Company’s future

Now that you know how a company performed and how it’s evolving, look at what’s in store for that company in the future. Will it be able to keep growing for years to come? Are there risks heading its way? Some things to look for include:

Mergers and acquisitions that bring challenges but also growth opportunities.
Company getting rid of non-productive assets or brands to improve their future results.
Announcements about new products, expansion in new markets or business areas.
Capital expenditures (CAPEX) invested in infrastructure; is it likely to bring revenue growth?
The company’s outlook for the full year, or the new year.

Interpreting a Weak Dividend Triangle – Part 2

Worried about holdings that show a weak dividend triangle? Revenue and EPS are falling, dividend growth is slowing down, or worse absent. What do you do? Last week we explored how to analyze falling revenue in a weak dividend triangle. Now we look at interpreting weak EPS and dividend growth.

In last week’s article, we explained the importance of putting metrics fluctuations in context and that the trend is your friend, meaning you must look at the evolution of metrics over time to understand what’s going on. Missed it? Read it here.

When earnings per share (EPS) are down

Earnings going down means the company is making less profit, not something that you like to see. Again, however, you must put that in context.

First, understand where that number comes from. EPS is based on accounting principles. Consequently, major events like impairments, one-time charges for an expansion and acquisition, and amortization impact the EPS even though these events aren’t necessarily bad things. Seeing the EPS go down raises a flag regardless, and it must be investigated. Reviewing the trend in Adjusted EPS (also called non-GAAP) can help here because one-time charges and amortization are not included.

Companies that make a lot of investments in assets or infrastructure have a lot of amortizations, and their EPS fluctuation often causes confusion.

Example: Brookfield Corporation (BN.TO / BN)

Recently, at the same time Brookfield Corporation (BN)’s EPS was going down, it announced a generous dividend increase. A business whose profit is plummeting is raising its dividend. “I’m losing my job I think I’ll buy a car.” It doesn’t make sense.

Since BN makes a lot of investments, it’s better off to look at funds from operation (FFO) and FFO/share rather than EPS. The FFO/share is at homemade metric and is not always easy to find. Financial websites show the adjusted EPS or EPS; digging into the quarterly statements and investor presentations will give you the correct picture. For Brookfield, they showed a company that’s growing and thriving, but EPS isn’t showing that profit yet.

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Example: TD Bank (TD.TO /TD)

Another example from last year was TD Bank which had lots of one-time fees in its financial statements.

Fees for TD’s decision to abort the acquisition of First Horizon, a prudent move in light of many U.S. regional banks having problems with their balance sheets, and some of them going bankrupt in 2023.
The FDIC, which ensures deposits in the US, requested a special assessment of all banks in the U.S. As TD does a lot of business there, it spent $100M for FDIC assessment, passing the stress test and proving it’s well capitalized and has a robust balance sheet
Due to the economy, all banks had to raise their provisions for credit losses.

Combining these three unrelated factors hurt the EPS, whose trend doesn’t look sharp right now.

Graph of TD's dividend triangle that shows weakening EPS but steady dividend growth — TD EPS fell, but dividend growth is still there

Yet TD kept increasing its dividend last year and will continue in 2024 why? While the one-time events hurt the business, going forward, we’ll forget all about those as the business will thrive.

What about dividend growth slowing down?

Slowing dividend growth is usually the result of the rest of the dividend triangle; it’s rare to see a company with a high single-digit to double-digit growth for revenue and earnings whose dividend growth is slowing down.

If you see a dividend increase slowing to 3% and then 1% after being at 6% over 3-4 years, chances are both revenue and earnings were slowing down before that. It is prudent management to slow dividend growth rather than bleeding a balance sheet to death just to pay shareholders, but it’s also a red flag.

Find stocks with a strong dividend triangle from our Rock Stars list, updated monthly!

Can the payout ratio help to assess dividend growth health?

Yes, definitely. When the dividend triangle is weakening and the dividend growth is slowing down, the payout ratio is probably rising. Now we’re looking at the Sell button on our dashboard. However, it’s important to look at the appropriate payout ratio. There’s the classic payout ratio based on earnings. As I said earlier, earnings are based on accounting principles, not on cash flow. You should be mindful of that.

The cash payout ratio is an interesting metric. It’s based on free cash flow, so it does not consider the company taking on more debt to finance capital expenditures. For a capital-intensive business, the cash payout ratio is not perfect either. Instead, use the funds from operation FFO payout ratio. You could also simply compare the company’s dividend per share with the amount of Distributable Cash Flow (DCF) per share to see if there is room there for future dividend growth. See The Different Payout Ratios – A Quick Tour for more details about them.

Again, context is essential. That said, a weak dividend triangle and a payout ratio getting higher starts to scare me a bit more and bring me closer to selling, but I’ll do more research.

What other metrics can help understand a weak triangle?

When I’ve established that I’m concerned about a stock’s triangle, I start by looking at the cash from operations metric, because cash is closely linked to the ability to pay a dividend.

I also look at the long-term debt trend. If the debt keeps rising, and the payout ratio is above 100%, the company is leveraging its future; it better succeed in bringing profit and cash flow to the table and later because if not, it’s literally financing its dividend.

Growing debt can be understandable when there are large projects to fuel growth; the company is financing its projects and using its cash from operations to pay dividends. However, this situation cannot be sustained for a long time. It can last for a few years, but at some point, the company must stop adding debt and pay some of it down.

What’s next?

If after looking at these two sets of metrics (the three dividend triangle metrics, and the payout ratio and debt), I feel it might be fine to keep the stock, I do more qualitative research. The goal is to understand more about what’s wrong with the business model. Is it the economy hurting the business? Competitors? Can management resolve the problem? Has management said it was addressing the problem during the earnings conference call? If they just ignore the problem, that’s another source of concern.

For how many quarters should we tolerate a downtrend?

It’s not so much about a set number of quarters, but rather the reason why the metrics are slowing down. If it’s due to an economic cycle, like a recession that causes many companies in the consumer discretionary to have even two years of bad results or poor growth. Knowing that it’s normal in a recession, I would not sell after one year. However, if it’s because the business is losing market share and not finding ways to improve over several quarters, then it would be getting close to my sell list.