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The Bank of Canada and the U.S. Federal Reserve both cut economic growth estimates for their respective economies this week. Domestically, Governor Stephen Poloz projected a growth rate of 1.5 per cent for the Canadian economy in the next number of years, well below the pre-crisis average closer to 3 per cent. Mr. Poloz advised Canadians that they will likely have to save more, work longer than they expected, and generally lower their expectations for their standard of living.
The Fed reduced its estimate of long term U.S. gross domestic product growth from 2.0 per cent to 1.8 per cent. Globally, the average economist estimate for 2017 global growth had been cut from 3.5 per cent to 3.1 per cent in recent months.
These developments strongly suggest that cyclical market sectors – consumer discretionary, industrials and many commodities – will underperform for the foreseeable future. They also change the risk profile for popular income-generating equity sectors.
Previously, higher interest rates and an accelerating economy were viewed as the main risks for income-generating equities. Higher rates would translate into higher bond yields and a reallocation of investor assets from dividends to fixed income. Accelerating growth would cause investors to move from slow growth dividend-paying sectors like utilities and into more aggressive growth stocks.
At this point, however, dividend and income yields are so far above government bond yields that rising rates are unlikely to be a threat for some time. With accelerating economic growth seemingly off the table, the real risk is that income-generating sectors "rot from the bottom," with revenues, profits and net asset values shrinking to the point where payments to investors are cut.
Dream Office REIT is a recent example of what can happen when economic weakness hits income stocks. The company announced a major writedown of its Alberta office properties in August and the unit price dropped 12 per cent immediately (it has since recovered significant ground).
Many dividend-paying sectors – utilities are a good example – should be able to weather a weak economic growth environment without incident. But investors in more aggressive, higher-yielding investments should pay close attention to the ongoing financial health of their holdings.
-- Scott Barlow
Three big numbers to note
4% The decline in U.S. crude Friday to $44.48 (U.S.) a barrel following signs that Saudi Arabia and Iran continue to disagree over oil output limits ahead of a meeting next week aimed at freezing production.
22% The jump in shares of Twitter Inc. after reports said Salesforce.com Inc. was among Twitter's potential suitors. Stock of Salesforce.com fell 5.8 per cent.
73% The drop in the share price of U.S.-listed Dublin-based pharmaceutical company Endo International Plc during the past year. But its shares jumped 15 per cent Friday after it replaced its chief executive officer.
Stocks to ponder
Reitmans (Canada) Ltd. Canadian retail is tough and the past couple of years have been particularly gruesome for bricks and mortar locations, writes Ben Stadelmann and Benj Gallander. Amid the fray, the stock price of Reitmans was chopped by roughly half. They bought the stock at $3.81, as contrarian investors, feeling it had a strong balance sheet with zero debt, high insider ownership and a sustainable dividend at a yield of 5.2 per cent. It's financial results have improved and they have a $16 sell target -- triple what the stock is today.
Bonterra Energy Corp. This Calgary-based oil producer has insider ownership at 12 per cent, recently reported better than expected second quarter results, offers investors a dividend yield of 4.75 per cent combined with 37 per cent cash flow growth forecast. Although with oil at $40-$50 (U.S.), the stock may require some patience from investors, writes Jennifer Dowty. The company reduced its dividend in 2015 and appears sustainable now at $1.20 a year, for a yield of 4.7 per cent. The average price target is $29.48, which implies nearly 17 per cent upside potential over the next 12 months.
Suncor Energy Inc. This major oil producer and oil sands operator bounced off of the negative breakouts lists on Wednesday, writes Jennifer Dowty, but its share price appears to be locked in a trading range. While the company's operations were negatively impacted by forest fires in the Fort McMurray region, the company's CEO on the latest conference call said he expects production growth of 40 per cent in the next four years. The company also recently raised $2.8-billion in financing. Its dividend yield is 3.4 per cent and the target price is $41.62, which implies 21 per cent upside potential over the next 12 months.
Tidewater Midstream and Infrastructure Ltd. Calgary-based Tidewater purchases, sells, and transports natural gas liquids and export to overseas markets. The company was began trading on the Toronto Stock Exchange in April,2015. The initial public offering price was $1 per share, writes Jennifer Dowty. The company reported solid second quarter results, has a dividend yield of 2.7 per cent and 12 analysts with "buy" recommendations and one "hold" recommendation.
Parkland Fuel Corp. This TSX stock has a rich dividend and is up 20 per cent in the last month, writes Brenda Bouw. An aggressive acquisition strategy that involves grabbing a growing share of Canada's gas station market is helping to drive up the shares of this company, which is Canada's largest independent seller of commercial and retail fuels. The stock has climbed about 20 per cent since Aug. 22, when Parkland announced its latest and largest deal to date: the $965-million purchase of the majority of Texas-based CST Brands Inc.'s Canadian business.
The Rundown
Four dividend growth stocks on sale
When I buy things at the store, I like to get them on sale, writes John Heinzl. The same goes for my investments. One of my favourite strategies as a dividend investor is to buy good companies when their share prices have hit a rough patch. Maybe the market in general is in a funk, or the company missed earnings estimates by a penny or two. As long as nothing has fundamentally changed in the company's outlook, buying a great stock when it's cheap – or at least cheaper than it was – is a sensible approach to building wealth. Here are four dividend stocks that have fallen from their 52-week highs by anywhere from 4 per cent to 9 per cent.
These stocks bring enticing dividend growth momentum
Dividend growth is great, but it's even better with a side order of dividend momentum, writes Rob Carrick. He pulls a list of stocks from the S&P/TSX 60 and came up with names including Canadian Pacific Railway, Agnico Eagle Mines, Fortis Inc., CIBC, and Power Corp.
Confessions of a small-cap investor
Unlike most of the shiny dross that tumbles off the Wall Street assembly line, ETFs have withstood the test of time by – surprise! – actually adding value, writes Fabrice Taylor. They've cut costs, allowed for increasingly targeted bets and have increased the amount of money going into the investor's pocket instead of into the financial industry's coffers. I'm practising what I preach here: While my day job is writing about smaller names and turnarounds, ETFs comprise the biggest part of my portfolio. But I'm not your average ETF investor. I'm far too restless for that. I'm a momentum ETF investor, meaning I want to go to geographies, industries and asset classes that are attracting money. He lists a few of his favourites, including the RBC Quant European Dividend Leaders ETF and others.
Is RBC building a robo-adviser?
Royal Bank of Canada's asset-management arm launched four new exchange-traded funds that tap into strong demand among investors for regular income – and executives aren't ruling out using the funds to create a bank-owned robo-adviser in the near future, writes David Berman. The new funds, which focus on preferred shares, infrastructure companies and corporate bonds, bring RBC's total offering to 28 different ETFs, all launched within the past five years.
Two ideas for cash flow at a reasonable risk
With interest rates in this country showing no signs of moving higher any time soon, investors continue to search the stock markets for investments that offer decent cash flow at a reasonable risk. Finding yield isn't difficult. It's the risk part of that equation that often trips up investors, writes Gordon Pape. He points out two yield stocks that look reasonably safe right now: Enercare Inc. and Firm Capital MIC.
The case for cash: Why it's not dead money
The most hated asset class in the world is one most investors wouldn't even consider an asset class: cash. Cash is often characterized as dead money earning next to nothing and acting as a drag on overall returns, writes Tim Shufelt. It's best deployed as quickly as possible and put to use in other, more productive vehicles, the argument goes. These days, investors seem willing to trade in cash for virtually anything that might earn them yield, no matter how small – even negative. But what detractors of cash may fail to recognize is its value in terms of capitalizing on future opportunities.
Gordon Pape's defensive portfolio has delivered over 8% annual growth
Gordon Pape writes that he created this Defensive Portfolio in March 2008, when markets were approaching record highs, which were reached a few months later. It is designed for investors who want some stock market exposure but also wish to contain their risk. The initial weighting was 40-per-cent fixed income, 60-per-cent stocks, with a starting value of $10,000. Because of the defensive nature of the portfolio, I set a target of 5-per-cent to 6-per-cent annual returns. It holds several broad Canadian bond ETFs, and stocks including BCE Inc. and Canadian Tire. Its compound annual growth rate is 8 per cent, beyond the 5-6 per cent target.
Gold bug heaven: Fund manager predicts $4,000 an ounce
Investors have learned in the past decade that almost anything can happen in global markets, but a lot would have to change for the gold price to reach $4,000 (U.S.) an ounce, writes Scott Barlow Nonetheless, fund manager Diego Parrilla of Old Mutual Global Investors told Bloomberg he believes there's "a few thousand dollars of upside" in the gold price.
Ask Globe Investor
The Question:
Brookfield Infrastructure Partners (BIP.UN) recently completed a three-for-two unit split. In the press release, it said that "any fractional units to be issued to registered unitholders as a result of the unit split will be rounded up to the nearest whole unit." In one of our accounts we held 117 shares pre-split, which post-split should be (117 x 1.5) or 175.5 shares rounded up to 176 shares. However, my discount broker gave us only 175 units post-split. So they rounded down instead of up. This does not seem fair. What should I do?
The Answer:
Because you hold your units with a discount broker, you are not a registered unitholder but a beneficial unitholder. (Registered unitholders hold their shares directly with the company's transfer agent). As such, the rounding up provision does not apply to you. However, that does not mean you will lose out. My BIP.UN units were also rounded down post-split, so I contacted my own discount broker, BMO Investorline, for an explanation. I was told that I would be receiving cash in lieu of the half share that I did not get. The cash hasn't arrived yet but I was assured that it would be coming in the next week or two. If you do not receive your cash in that time I recommend that you contact your broker. It's not a lot of money -- about $20 -- but you are correct that it would not be fair for beneficial unitholders to take a loss simply because of a unit split.
--John Heinzl
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What's up in the days ahead
In an attempt to burnish their image with investors and drive stock prices higher, companies are offering up a host of gerrymandered measures to make their costs appear lower, and their profitability higher. The use of these customized earnings measures that do not adhere to generally accepted accounting principles is growing in Canada, posing a quandary for both regulators and the investors they're charged to protect. In this weekend's Globe Investor, we take an indepth look at the issue, including exclusive figures on just how common this numbers game is in this country, and how investors could be misled into thinking their stocks' financials are doing better than they are. On Monday, watch for Jennifer Dowty's profile of TMX Group, the owner of the Toronto Stock Exchange, and Rob Carrick talking about D series funds.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Gillian Livingston