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A big vote of confidence in Canadian dividends

Dividend yields may be a once-in-a-generation opportunity, says this veteran analyst, and there’s no better place to cash in than Canada.

At the height of the high-tech frenzy a decade ago, most of the hot new stocks roaring up the charts paid no dividends.

Who needed them? A cartoon of the day pictured three young hot shots asking their seasoned boss: “And these ‘dividends’ they used to hand out — where exactly did the money come from.”

Dr. Michael Graham hung on to that cartoon. He has seen many trends, cycles and fads come and go. Some were scary.

Some of them made good investment sense. A decade before the high-tech carnival, bonds were a sound and timely buy as recession rolled across North America.

Today, dividend yields “could well represent another once-in-a-generation investment opportunity,” Dr. Graham writes in The MoneyLetter.

And here’s another trend that we can take heart in — few markets in the world today are growing a better crop of dividends than Canada.

Dr. Graham tells us why, and then presents no less than a dozen stocks that he deems good buys for yields today and gains tomorrow.

Not on skid row

There is no need to retrace the sad story of the financial crisis with its billions of dollars of toxic waste, massive bailout packages, and the seething anger of a disabused public.

But there’s one corner of the world where the banks aren’t on skid row. That would be Canada “where there has never been the threat of a major bank failure, nor have there been calls for bailouts or government intervention or stress testing,” says Dr. Graham.

And Canada’s banks keep paying dividends when many of their fellows around the world have slashed or dumped theirs altogether.

The 2008 World Economic Forum declared the Canada’s the healthiest banking system in the world. And then there is Mr. Paul Volcker. The former U.S. Federal Reserve chief, famous for his tough inflation-fighting measures thirty years ago, is back at work for the Obama administration.

He is arguing “for an overhauled American banking system that looks more like the Canadian system,” says this analyst.

Canada’s banks aren’t in perfect shape, of course, but their dividend yields are looking very healthy.

An island of safety

Dr. Graham spares no praise for dividends in these bleak days.

Hang on, here goes. They are “an enduring combination of desirable investment attributes: a bear market protector, something you can take to the bank, a commitment to shareholders, a vote of confidence in cash flow continuity, a growing total return contributor, a provider of investment stability, and an island of safety in the midst of a hurricane.”

And of course the higher the yield, the less you are paying for the return on your dividends.

The “industry leaders” among Canadian banks have lower yields than their peers, but those yields are still juicy — 5.4 per cent for Royal Bank of Canada (TSX-RY) and 5.6 per cent for Toronto-Dominion Bank (TSX-TD).

Bank of Nova Scotia (TSX-BNS) yields 6.3 per cent “upholding its reputation for international risk management,” says Dr. Graham.

The yield can get uncomfortably high if the shares are underachieving and the two banks that suffered the most contagion from the credit crisis are in nosebleed territory — CIBC (TSX-CM) at 7.4 per cent and Bank of Montreal (TSX-BMO) at 8.5 per cent. Still they have shown “encouraging improvement” according to this expert.

The analyst adds that he grew up in an era when it was a rule of thumb to sell the banks when they yielded three per cent and buy them when they yielded four.

Today the proposition is simple. Canadian bank share yields “remain historically attractive on dividends that haven’t been cut in over 70 years,” says Dr. Graham.

“You can also be sure the investment bankers at leaders like Royal Bank are burning the midnight oil in anticipation of the avalanche of corporate acquisitions, mergers, financings and restructurings to come.”

Good for dividends

Succulent yields in Canadian finance don’t stop with the banks. Power Corporation of Canada (TSX-POW) yields 5.9 per cent “with its extensive insurance and investment product underpinnings.”

More debatable is the desirability of the 7.3 per cent yield of Manulife Financial Corporation (TSX-MFC) and its well-documented troubles. Dr. Graham insists that it is still a solid leader in the industry. “It is no AIG.”

From financials, the analyst moves to utilities, where steady revenue streams are good for dividends. Two pipelines that keep that flow going nicely are Enbridge Inc. (TSX-ENB), which yields 4.1 per cent, and TransCanada Corporation (TSX-TRP) at 5.1 per cent.

In telecommunications, BCE Inc. (TSX-BCE) is not only back in the public marketplace, it appears with its dividend reinstated and increased. It yields 6.1 per cent.

Completing this list of a dozen yield-worthy stocks are information megafirm Thomson-Reuters (TSX-TRI), yielding 4.4 per cent, and one resource firm, EnCana Corp. (TSX-ECA) at 3.9 per cent.

Dr. Graham reminds his readers in The MoneyLetter that back in the dark days of 1982, markets “started going up without explanation when things looked bleakest.”

That happy history may not repeat itself precisely, but there’s no need to be left behind, adds the analyst. Buying good dividend yields at discount prices isn’t just a good defensive measure — it will put you ahead of the pack when things start looking up again.