Searching for dividends

These securities will recover as interest rates stabilize.

By Gordon Pape, Editor and Publisher

If all the portents are right, 2024 should be a good year for dividend stocks. It’s about time. These normally dependable low-risk securities were savaged during the sharp run-up in interest rates as the central banks fired all their guns at the inflationary genie.

Solid utilities like Fortis saw the market price of its shares fall 19% between May 2022 and September 2023. Enbridge was down 23.7%. BCE lost almost 25%. Talk about blood in the streets!

This was not supposed to happen to conservative portfolios, but it did. Investors were shell-shocked, and with good reason.

The good news is that the share prices of these securities should recover as interest rates stabilize and eventually reverse course. The US Federal Reserve Board signaled in December that it anticipates lowering interest rates three times this year. There’s no guarantee, of course – inflation may decide to hang around longer than expected. But all signs indicate the next moves from the central banks will be down, not up.

So, how can you take advantage of this situation? One possibility is to emulate our model High Yield Portfolio, which is tracked in our companion Income Investor newsletter. At the time of our last review, in September, it was showing an average annual compound rate of return of 7.8% over 11-1/2 years, with annual cash flow of 5.7%. This was at a time when interest-sensitive securities were bottoming out. Some of the stocks we hold are Enbridge, Pembina Pipeline, Sun Life Financial, Capital Power, BCE, and Canadian Imperial Bank of Commerce.

If you’re confident in your stock picking abilities, aided by our recommendations, you could build your own dividend portfolio. Make sure it’s properly diversified across all the key sectors: financials, utilities, telecoms, REITs, and pipelines. There are also good dividend payers in areas you wouldn’t normally consider. Examples are Russel Metals, with a dividend yield of 3.6%, and Aecon Group, which yields 5.4%.

Another possibility is to invest in dividend ETFs. There are dozens of them in Canada. The iShares S&P/TSX Dividend Aristocrats Index (TSX: CDZ) is one that should be considered. It was recommended in Income Investor in 2011.

This ETF invests in a portfolio of large cap stocks that have increased dividends annually for at least five consecutive years. No position is larger than 3.25%, so it’s a well-balanced portfolio. Holdings include Aecon Group, Chartwell Retirement Residences, Great West Life, CIBC, and Power Corp. The fund gained 9.26% in 2023 and has a ten-year average annual compound rate of return of 6.41%. Monthly distributions are currently $0.106 per unit. Closing price on Friday was $31.25.

Another Canadian ETF to look at is the iShares Core MSCI Canadian Quality Dividend Index ETF (TSX: XDIV). It invests in a portfolio of Canadian high-dividend stocks with steady or increasing yields. It gained 16.4% in 2023, more than double the return of the TSX Composite.

This is a more concentrated portfolio, with only 17 holdings. This means bigger bets on each stock, which translates to greater return potential but higher risk. Top holdings are Royal Bank (9.81% of the portfolio), Manulife Financial (9.65%), Pembina Pipeline (8.97%), TD Bank (8.93%), and Fortis (8.71%). Distributions are paid monthly and are currently running at $0.103 per unit. I’m impressed with this fund, and we’ll add it to the IWB recommended list. The units closed Friday at $25.64.

If you’re interested in a US-based dividend ETF, consider the iShares Core Dividend Growth ETF (NYSE: DGRO), which was recommended in the IWB by Adam Mayers in December 2019 at US$41.26 and is currently trading at US$53.94. It invests in a diversified, equal weight portfolio of US companies with a history of dividend growth. The names are familiar to all investors and include JPMorgan Chase, Microsoft, Johnson & Johnson, Exxon Mobil, Chevron, AbbVie, and Broadcom. The fund gained 10.43% in 2023 and has a five-year average annual compound rate of return of 12.88%.

I like dividend stocks in all circumstances, but I think they look especially attractive this year, given the current situation. If you are underweight in these securities, now is the time to stock up.

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