If you missed the rally, don’t miss these stocks
The stock market rally of recent months has left some dull dividend paying stocks behind, says this Canadian advisory, but you shouldn’t.
What if they held a stock market rally and you missed it?
What if the rallies that have pulled up the market over the past few months are over — and you missed it?
Never mind the what-ifs, says one seasoned observer. Think carefully about what you can get, not what you didn’t get.
There are a group of sound, dividend paying stocks that got left aside in the rush of the last few months, says Mr. Larry MacDonald.
Writing in Investor's Digest of Canada, he says these stocks are better buys than a lot of the stocks that were bid up during the rally.
For one thing, their dividend yields are still a heck of a lot better than GICs or government bonds.
For another, the recent rise of the stock market may not be the big blast-off to a new bull market, as some seem to believe.
So some rather dull but well-paying stocks may be just what Canadian investors need in the days ahead. Mr. MacDonald explains why and then tells us about the four stocks he likes.
The search for yield
“The recent rush into stocks has largely bypassed conservative, non-cyclical companies paying high and growing dividends,” says Mr. MacDonald. “Indeed, money appears to have shifted out of such defensive stocks into higher risk, more cyclical stocks on the assumption the recession is ending.”
The price trends of stocks like these have been flat or even pointing down since early March, which is when the stock market began to point up.
But there are two reasons to think they could do much better in the months ahead.
“It’s possible the ‘search for yield’ could lead many cash-rich investors to switch into these dividend stocks, which could help bring their prices up,” says this analyst.
Moreover, the dramatic rally since early March “could turn out to be an overreaction to the appearance of ‘green shoots’ in the economy,” he adds. If the market now starts to wear down and undergo a correction (and it certainly has looked rather correctible in the past few days), defensive stocks could get popular again in a hurry.
The proverbial tortoise
Mr. MacDonald’s four recommended stocks are utilities. When the market is rushing ahead, it’s no surprise that these lumbering giants get passed by. But like the proverbial tortoise, they’re still moving ahead when the hares have cramped up and fallen out of the race.
Especially if this market is all rallied out.
The first of these patient plodders is TransCanada Corporation (TSX-TRP), which yields 4.6 per cent. About 70 per cent of its earnings go to the dividend, that is, straight into your pocket.
TransCanada has raised that dividend an average of 5.5 per cent over the past five years. And since most of its revenues come from regulated sources, the earnings are about safe as earnings can get.
The company is in the midst of a program of capital expenditure, which means earnings will not grow much in the near future. But a year or so from now, those expenditures should blossom into bigger earnings.
“And if the Mackenzie Pipeline ever gets built, TransCanada will be a major beneficiary,” says the analyst.
TransAlta Corp. (TSX-TA) pays a yield of 5.8 per cent on a substantial payout ratio of 80 per cent of earnings. The dividend has grown at a modest rate of 1.5 per cent over five years, but there is a share buyback program as well.
This natural gas utility has a rather high debt load, which might scare off some investors, the analyst admits. But others are reassured by the fact that it has always put a high share of its earnings into dividends.
Plus, it is headquartered in Alberta, where the population in need of its services is growing at a better-than-average rate.
A good reputation
Telus Corp. (TSX-T) yields 5.8 per cent on a dividend payout ratio of 60 per cent. Dividend growth is a very health 35 per cent per annum.
The share price has not had a brilliant run of late thanks to news of a drop in wireless sales during the recession. And there’s money to be spent on upgrades in its networks. But costs are also being cut.
And the stock’s valuation is more attractive than that of its telecommunications rivals, Mr. MacDonald adds.
Fortis Inc. (TSX-FTS) is currently yielding 4.3 per cent on a payout ratio of 70 per cent of earnings. The payout is slightly higher than it is most years for this company (which began life as Newfoundland Power).
Unlike many of its fellow utilities, Fortis acts as a growth stock. It is involved in more businesses in more places than most utility firms.
Fortis has “a good reputation in the investment community,” Mr. MacDonald tells his Investor's Digest of Canada readers. “It has predictable earnings growth and a solid pattern of dividend increases.”
At the moment, the market is not showing much of a rally.
But that is the whole point of getting aboard these tortoises. They will go on paying you predictably even when the market is at its most unpredictable.
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