Is the dividend golden era over?

There is much debate as to whether the dividend-focused investment model is a safe bet moving forward. Some critics argue that the days of decent returns through dividends are over.

In a recent interview with The Globe and Mail, Dirk Lever, managing director at AltaCorp Capital, stated that he recently looked at 11 Canadian E&P companies and concluded that while total annual dividends for the firms are 30 percent below their 2008 peak, they are still more than 40 percent higher than they were in 2005.

While that might sound enticing, especially given the market environment over the past two years, Lever also noted that the total share count for these companies increased by 140 percent from 2005 to 2012. That is a concern for those wanting to avoid share dilution.

Though regular monetary payouts are appealing, investors would do well to practice caution. Many analysts question whether oil and gas juniors will be able to mix high-risk E&P with what is ultimately a blue-chip business model.

Gung-ho investors, especially within the junior space, need to realize that if capital costs or unbudgeted expenses arise, companies (especially juniors) will likely have to cut dividends or rein in activities in the field. That means that companies sending money to investors will have less cash to work in the field, the result of which will likely be a drop in share prices and dividend payouts.

Far from simple

Many feel that building a portfolio of dividend-paying oil and gas stocks is easy in that investors simply have to purchase stocks that pay the highest yields. That is not the case.

New research from Fidelity portfolio managers indicates that relying solely on information about past payouts may provide some return on investment, but can also leave investors overexposed, a very real concern within the current market.