The four best dividend-paying stocks in Canada
Don’t go tossing out all your income investments just because rates are low, says this Canadian expert, but add a few solid dividend stocks.
Our title may sound rather bold — it’s not easy to pick the four best of anything.
Of course it’s one man’s opinion. But it’s a particularly interesting opinion, because this man doesn’t believe income investors should be dumping bonds and GICs in favour of equities just because rates are low.
Many advisers are recommending this strategy nowadays, and many investors are following it.
It’s a flawed strategy, says Mr. Keith Richards, an author and seasoned wealth management executive.
Conservative investors should keep conservative investments in their portfolios, he writes in Investor's Digest of Canada.
That means safe, income-producing securities. But for the sake of balance, it also means a few sound dividend-paying equities. Mr. Richards explains his philosophy and, after careful study, emerges with four top dividend payers for a conservative portfolio.
Chasing returns
Mr. Richards believes that every investment portfolio should hold both fixed-income securities and equities. A simple enough proposition — you hold the equities for long-term growth, and securities like bonds and preferred shares for a steady steam of income.
But low interest rates are no reason to give up this income, he warns. “Investors become so fixated on chasing a higher return that they don’t think about the increased risk to their portfolios inherent in doing this.”
The “Great Recession” of 2008 and 2009, he says, ought to have demonstrated the dangers of replacing low-risk securities with equities in the scramble for higher returns.
Having got that off his chest, the analyst turns to that part of a portfolio that should be in equities. Here, he says, you should look for dividends that produce a steady yield.
What are you waiting for?
From 1926 to 2009, the S&P 500 Index returned an annualized 9.5 per cent. Reinvested dividends accounted for 44 per cent of that return.
From 1972 through April 2009, dividend-paying stocks on the S&P 500 returned 8.7 per cent compared to an overall average of 6.2 — and a skimpy 0.7 per cent for stocks that paid no dividends.
Not least, says this analyst, a Merrill Lynch study reported that in periods of greater market volatility, stocks with the highest yields did 20.3 per cent better than those with the lowest yields.
In short, what are you waiting for? Mr. Richards seems to be saying.
He screened equities on the S&P/TSX Composite Index for balance-sheet strength, predictable revenue and “good chart formations.”
Four took the prize. Three are stocks and one is an income trust.
Dividend growth
Here are the winners. Fortis Inc. (TSX-FTS) yields 3.9 per cent on a dividend of $1.04 and trades at $26.77. BCE Inc. (TSX-BCE) yields 5.7 per cent on a dividend of $1.62 and trades at $28.13.
National Bank (TSX-NA) yields 4.1 per cent on a dividend of $2.48 and trades at $59.65. Bell Aliant Regional Communications Income Fund (TSX-BA.UN) yields a robust 10.7 per cent on a distribution of $2.90, and its units trade at $27.00.
Fortis, an electricity and natural gas utility that has grown substantially in the past few years, “has the potential to raise its dividend over time,” says Mr. Richards. Technically speaking, the shares appear to have more room to move up, he adds.
BCE, of course, is a special case. Since the demise of the Teachers Pension Plan deal to take it private, the phone company has seen its shares trade in a sideways pattern, drifting between $23 and $27.
The current yield looks secure, says the analyst, and some predict a dividend growth rate of five per cent. The stock may break out of its trading range, but even if it doesn’t, “one could purchase the stock anywhere at or below the middle of that range and enjoy the dividend income while holding it.”
Making an exception
National Bank has a very high dividend safety ranking, Mr. Richards tells us. He also likes the fact that it has far fewer fingers in the U.S. economy than some other big Canadian banks.
That makes it attractive “for those who are bearish on the U.S. dollar.” On the other hand, his charts tell him the stock may have trouble breaking much above the $65 level, so while it’s a good stock for yield, there may be a growth ceiling in the foreseeable future.
“Normally, I’m not completely comfortable with income trusts,” admits this analyst. Many pay out more in dividends than they earn. And of course they face the 2011 distribution tax, which may cause the market to turn on trusts in general.
Nor are they fixed-income investments, he emphasizes. Investors should not move capital that would be better off in bonds or preferred shares over to income trusts.
But among trusts, he makes an exception for Bell Aliant. It has a stable balance sheet, a high yield and an attractive business model. Whether or not the trust converts back into a company, it looks appealing.
The key to good returns today, Mr. Richards tells his readers in Investor's Digest of Canada, is to pay attention to the risk you run with each security and the quality of each investment.
In other words, don’t give up the money you’re making today for money you might make tomorrow.
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