Feeling a mite peckish? Canadian investors sure are. They're gobbling up stocks that pay dividends. Today, with the help of a recent report from National Bank Financial, we'll look at dividend-paying stocks that lie outside the sectors traditionally thought of as yield plays.
What are we looking for?
Dividend-paying stocks that aren't REITs, oil and gas producers or pipeline operators.
What did we find?
More than 220 TSX-listed corporations fit our criteria, spanning industries from transportation to health care. National Bank says the average estimated 2011 yield for these "diversified" companies is 4.2 per cent, with the typical payout ranging from 7.6 per cent for real estate services firms to 2.3 per cent for technology companies.
Trevor Johnson, author of the National Bank report, points out that income-paying diversified equities have outperformed the broad market so far in 2011, posting a 5.9-per-cent return compared to 4.9 per cent for the S&P/TSX composite. This continues a trend. Last year, dividend-paying diversified equities bested the market, 22.7 per cent to 14.4 per cent.
Much of this outperformance has been concentrated in stocks with 7 per cent to 8 per cent payouts and speaks to investors' hunger for yield. But you have to wonder whether there are limits to this appetite. If companies cut dividends - or simply don't raise them for an extended period - shareholders may be in for a spell of indigestion.
Fortunately for investors, Mr. Johnson believes many of the 6-per-cent-plus yields are sustainable, at least for 2011. Among the top yielders in his sustainable universe are EnerCare (9.3 per cent), CanWel Building Materials (8.9 per cent) and New Flyer (11.3 per cent).
He believes many dividend payers are well positioned with a combination of generous yields as well as "outperform" rankings from National Bank analysts. He points to CIBC (4.2 per cent), Genworth (3.9 per cent) and Premium Brands (7 per cent) as examples.
Still, a note of restraint is in order. "We remain cautiously optimistic regarding 2011 sector upside, but it will be difficult for the dividend payers to sharply outperform the broader market to the same extent [as in 2010]as our analysis suggests stretched equity valuations across all the subsectors," writes Mr. Johnson.