When rates rise — don’t give up the dividends!
Don’t let the fear of higher rates chase you out of dividend stocks, says this Canadian advisory, looking at five stocks that raised their payouts.
As a rule, it’s fairly easy to make the case for dividend stocks.
You’re bound to think well of someone who sends you cheques regularly, for one thing.
And of course stocks that pay dividends tend on the whole to be wealthy, reliable and more immune to market shocks than most.
But even those who agree with all of the above may see clouds gathering on the horizon for dividend stocks.
One leading Canadian advisory puts it simply. “The next major move in interest rates will be up.”
And that could lead many income investors away from dividend stocks and into bonds, GICs and other interest-bearing securities.
The Investment Reporter, which has been around for seven decades, is a staunch advocate of dividend-paying stocks. And it doesn’t believe Canadian investors should give them up due to a rate scare.
Investors should, however, show a clear preference for those companies that raise their dividends, says the advisory.
It explains the situation investors are liable to be facing and outlines the perils of fleeing to fixed-income investments.
It also cites five stocks that have done the right thing.
A lurking enemy
Some rate raising has already taken place. China and Australia have done it twice. The U.S. Federal has raised its discount rate. The more important federal funds rate is sure to follow.
The Bank of Canada held its hand on rates recently, but almost everyone expects them to go up this summer.
And as soon as rates go up, conservative investors who really aren’t all that comfortable with stocks will flock to bonds and GICs, where the yields are safer. At least in theory.
“We agree that a well-diversified portfolio should hold some fixed-income investments,” says The Investment Reporter. But there’s a lurking enemy that can chip away at fixed-income investments.
Inflation. The fear of higher inflation is the driving force behind higher rates, of course.
As the cost of living goes up with inflation, the value of fixed incomes dwindles. The higher rates go, the more they diminish the value of bonds purchased at lower rates.
It all becomes a vicious circle, and no one feels the effects more keenly that those who depend on fixed incomes, especially the retired.
In short, too much safety can be dangerous! It’s a bit like fleeing to the lifeboats only to watch the big ship right itself and sail away.
Best of both worlds
Companies can combat inflation, says The Investment Reporter. They can raise prices to cover some of their costs.
“They can also pass some of this along to you in the form of rising dividends,” adds the advisory. And this carries you above the tide of inflation. “A stream of rising dividends will enable you to exceed the rise in the cost of living.”
If you insist on avoiding stocks, the advisory says, you could combat inflation with real-return bonds, which adjust for inflation. “But even these face full taxes, while dividends are taxed at much lower rates.”
Higher interest rates may, indeed, hurt the share prices of companies that don’t raise their dividends, says the advisory. On the other hand, studies show that stocks that raise their dividends also tend to see their shares rise over time.
So you get the best of both worlds, with income now and income later.
Earning more
“You earn more when companies raise their dividends,” repeats The Investment Reporter. Five of the stocks it follows regularly recently did so. Four are Canadian, and one is from the U.S. All are buys.
Steady utility stock Emera Inc. (TSX-EMA) pushed its dividend up by 3.7 per cent, to $1.13 a share. Emera is yielding a rich 4.7 per cent on that dividend, and trading at $24.08.
Another utility, TransCanada Corporation (TSX-TRP) upped its dividend by 5.3 per cent to $1.60 a share. The yield is 4.4 per cent and the share price stands at $36.14.
Richelieu Hardware (TSX-RCH), which introduced its dividend just a few years ago, recently raised it 12.5 per cent, to 36 cents a share. The dividend yields 1.6 per cent and the shares trade at $22.25.
Shoppers Drug Mart (TSX-SC) has raised its dividend by 4.7 per cent to 90 cents a share. It yields 2 per cent and trades at $44.67.
In America, 3M Co. (NYSE-MMM) raised its dividend almost 3 per cent to $2.10 a share. It yields 2.5 per cent and trades at $81.56.
This advisory is firm. Don’t let higher rates lead you down the garden path of false security. The best growth is still among the dividends.
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