High-yielding stocks and trust units can be a warning sign that the market feels the distributions are less than secure. But as Trevor Johnson, an analyst at National Bank Financial, points out, many of these equities have been in high-demand recently.
"The higher yielding equities are outperforming the lower yielding, with this outcome further evidence that investors are indiscriminately buying yield, a trend we believe persists given an imbalance between robust demand for income but a limited supply of assets providing it," he said in a note.
Translation: Low interest rates are encouraging income-oriented investors to snap up higher-yielding equities.
Mr. Johnson looked at 225 dividend-yielding equities that trade on the Toronto Stock Exchange but don't fall into the usual categories of oil and gas companies, real estate investment trusts and pipelines. He calls these "diversified" equities, and they range from restaurants to media firms to transportation companies.
Despite the different underlying businesses, they have at least one thing in common: They outperformed the broader S&P/TSX composite index last year, with average price gains of 22.7 per cent, versus 14.4 per cent for the index.
Just as impressive, the higher-yielding equities (defined as those with yields of 7 per cent or more) have been outperforming the lower-yielding equities by an average of 15 per cent in 2010.
Mr. Johnson believes the trend will continue into 2011, possibly because the Bank of Canada is expected to remain cautious about raising interest rates given the uncertainty of the economic recovery and the strong Canadian dollar.
Higher-yielding equities whose distributions are sustainable look particularly attractive. These names include EnerCare Inc., Leisureworld Senior Care Corp., Student Transportation Inc., Labrador Iron Ore Royalty Corp., Armtec Infrastructure Inc., Superior Plus Corp., Pizza Pizza Royalty Income Fund, Bell Aliant Inc. and Yellow Media Inc.
He also identified a handful of lower-yielding names that could raise their distributions, given that they have relatively low payout ratios. These names include: K-Bro Linen Inc. (with a 5.9 per cent yield and a 55 per cent payout ratio), Davis + Henderson Income Corp. (5.7 per cent yield, 60 per cent payout ratio), Genivar Inc. (4.9 per cent yield, 60 per cent payout ratio), Boyd Group Income Fund (5.3 per cent yield, 40 per cent payout ratio) and AutoCanada Inc. (3.3 per cent yield, 30 per cent payout ratio).