John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
With oil prices cut in half, interest rates at near-record lows and the loonie losing altitude fast, many investors are gripped by more than the usual amount of anxiety.
But Greg Newman is taking the volatility in stride.
"Everybody thinks this isn't an easy time to put money to work. It never is. You're always sweating it," says the associate portfolio manager with ScotiaMcLeod.
Rather than letting himself get paralyzed, he's trying to use the recent market gyrations to his advantage. For example, although the Bank of Canada won't say it, Mr. Newman believes the central bank is deliberately trying to keep the loonie low in order to stimulate the economy. An 80-cent (U.S.) dollar benefits exporters and also takes the edge off plunging oil prices, because a barrel of oil priced at, say, $50 is worth $62.50 (Canadian).
"For that reason, I think we're going to eventually see a lower Canadian dollar than even what we have now; so you want to find companies that can benefit from that low dollar," he says.
He also looks for companies that stand to benefit if interest rates eventually rise from current depressed levels. "Maybe not this year, but eventually over the next couple of years you're going to have more upward rate pressure than downward," he says.
As for energy stocks, he's avoiding them. The money that's flowing out of the oil patch will find its way into other sectors, he says. Although some sectors have gotten expensive, he's still finding stocks trading at what he considers attractive valuations.
Here are some of his current holdings and the reasons he likes them. Remember to do your own due diligence before investing in any security.
Power Financial (PWF)
Price: $36.21, down 55 cents
Yield: 3.9 per cent
Power Financial's businesses in insurance (Great-West Lifeco) and asset management (IGM Financial) are poised to benefit in coming years from improving financial markets and a possible rise in interest rates. Demographic trends are also favourable "in that Power Financial is essentially a provider of wealth solutions for an aging population," Mr. Newman says.
The company is trading at about 11.2 times estimated 2015 earnings – below its five-year average of 13 – and, given its low payout ratio of 44 per cent of earnings, he expects it will resume dividend increases soon after holding its payment steady for many years.
Manulife Financial (MFC)
Price: $21.30, down 25 cents
Yield: 2.9 per cent
With roughly 45 per cent of its revenue coming from the United States, Manulife Financial stands to benefit from a lower Canadian dollar. The company is growing quickly in Asia, has strong capital levels and trades at about 12.2 times estimated 2015 earnings – slightly below its five-year year average.
"We believe that higher interest rates should eventually be a tailwind and that better capital markets should also continue to assist," he says. "Enjoy the near 3-per-cent dividend yield while management strives to improve core earnings."
Shaw Communications (SJR.B)
Price: $28.75, down 4 cents
Yield: 4.1 per cent
Cable TV, Internet and land-line phone provider Shaw Communications has no wireless exposure, so – unlike Rogers, Telus or BCE – the company won't be hurt if a fourth national wireless carrier emerges. Thanks to lower capital expenditures, Shaw is poised to grow its free cash flow 30 per cent on an annualized basis through the end of 2017.
"As such we expect to see dividend growth of 5 to 10 per cent annually over the next few years on top of the already generous 4-per-cent-plus yield it pays," Mr. Newman says.
WSP Global (WSP)
Price: $37.34, down 79 cents
Yield: 4 per cent
Engineering design consultancy WSP Global (formerly Genivar) generates more than one-third of its earnings from the United States following its 2014 acquisition of Parsons Brinckerhoff, a transportation infrastructure specialist. "So [WSP] stands to benefit from a weaker Canadian dollar," Mr. Newman says. The deal will boost 2016 EBITDA (earnings before interest, taxes, depreciation and amortization) about 20 per cent and "greatly expands their global and U.S. footprint."
With a payout ratio of 58 per cent of estimated 2016 free cash flow, he considers the dividend safe.
Canadian Utilities (CU)
Price: $40.52, down 5 cents
Yield: 2.9 per cent
"We like Canadian Utilities for its lower risk and higher growth profile," Mr. Newman says. He expects cash-flow growth of 13.8 per cent and dividend growth of 10 per cent – both on an annualized basis – from 2014 through 2016, driven by $5-billion of secured expansion projects. The 2015 estimated payout ratio of 38 per cent of free cash flow means the dividend is secure. Earnings are predictable because 75 per cent of the business is regulated, and the stock trades at a discount to its peers, he says.
Disclosure: The author owns shares of Canadian Utilities, both personally and in his Strategy Lab model portfolio.
John Heinzl