Watch list
Canadian dividend payers:
Rising interest rates of the past year have hurt dividend-paying stocks, but the Bank of Canada is holding the line indefinitely because inflation is cooling. That means the dividend names are catching a break. These days, retirees and other seekers of dividends have the choice of sticking their money in a money market fund or high-interest sales account that pays 5% or investing in a dividend stock. Sure, the former is a safe bet, protected from the whims of the market, but the latter pays a comparable dividend yield plus share appreciation. Of course, shares can sink too. So, what are the safer dividend plays out there on the TSX?
One of the most renown stocks in Canada is Fortis. If you don’t know it, Fortis is an electric and gas utility distributing power in Canada and the U.S. Gas-fired power, hydro-electicity, solar and wind are make up some of its deep portfolio operating across the American southwest, Alberta, Ontario and the Maritimes. The company’s contracts are regulated, which ensures a predictable stream of cash and helps lift their dividend, which has risen for the past 49 straight years. Yes, debt is high, but manageable because of that cash stream.
Interest rates hikes of the past year have impacted Fortis shares, which peaked a year ago at $65.26, but have rebounded so far in 2023 by 10% to just under $60. The interest rate pause should continue to push Fortis higher. FTS trades at 21.44x, currently higher than its five-year average of 19.28x, but lower than 24.5x a year ago. The beta is a super-low 0.16, and it pays a 3.80% dividend yield based on a 78% payout ratio. FTS has met or beat three of its last four quarters, and next reports on May 3. Definitely watch that report.
Sun Life Financial Inc (SLF-T)
SLF remains a buy after I recommended this in January. SLF has a stake in Asia, so China’s reopening will be a tailwind. Acquisitions in Hong Kong and the U.S. will expand SLF’s operations in life insurance (the former) and wealth management (the latter) and be accretive overall in time. SLF pays a 4.49% dividend anchored by a 53% payout ratio. Take note that SLF trades at a 12.57x PE, around its historic average, and is higher than its peers, including perpetual underperformer Manulife and Great-West Lifeco, but the market has traditionally allowed that premium.
Performance in the past four quarters has been solid with three strong beats and one quarter coming in-line. SLF currently trades around $64, which is $5 below its 52-week high. As for its peers, Manulife pays an attractive 5.57% dividend, but it can never break above $27.50 and shares are currently touching the top of its trading range. MFC is a fast trade at best. Great-West Life is in a similar boat, paying a 5.49% yield, but is a dollar away from returning to its historic ceiling of $39 that it hasn’t broken yet. In contrast, SLF’s chart a gradual rise since 2011 of higher highs and higher lows.
iSHARES SP TSX COMP HIGH DIV INDEX ETF (XEI-T)
Can’t decide which dividend stock to buy? Consider this basket which holds Canada’s biggest divvy names, starting with Telus, BCE, CNQ, TC Energy, Enbridge, Royal Bank, TD and Suncor. As you can see, banks (28.6%) and energy (29.6%) dominate. Because of the U.S. regional bank crisis last month, investors have shied away from financials on this side of the border too. However, that trade is slowly coming back.
On April 17, Schwab—battered by the crisis—issued a positive quarter to prove it isn’t dead and its shares popped over 2%. Similarly, TD has recovered over 7% in the past month. Energy, particularly pipelines, remain a strong trade, despite the price of crude oil being rangebound this year and a long ways from last year’s 2022 peak of $120. Between March 24 and April 24, XEI climbed 7% while the TSX added 6.4%.
XEI pays a 4.89% dividend yield, trades at an 11x PE and a 0.91 beta. Volumes average 73,300 so daily trading can be a little choppy, but a dealbreaker. XEI charges only a 0.22% MER. If you’re skittish the banks and are an ESG investor, avoid XEI. All others, give this a look.
