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(Nikolay Neveshkin)
(Nikolay Neveshkin)

Rob Carrick

A clear-cut case for buying stocks Add to ...

Buy. Stocks.

For a change, here’s some clarity in the investment outlook.

You no doubt know all the reasons to be wary of stocks: Europe’s debt problems, economic malaise in the United States and questions about whether China’s economic growth machine is slowing down. Oh, and let’s not forget the fact that the Canadian market was down 10 per cent for the year through last week. Faced with all this uncertainty, many investors are zoned out.

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“We characterize it as economic post-traumatic stress syndrome,” said David Baskin, president of Toronto-based Baskin Financial Services. “Having gone through the experience of 2008-09, investors don’t want to go through it again.”

Nervousness is natural, investors, because there’s a lot we don’t know about what’s ahead. But Mr. Baskin makes a case that what we do know argues strongly for buying high-quality dividend stocks right now.

He starts with the fact that the dividend yield on the S&P/TSX composite index is about 2.8 per cent, which is the second-highest level in the past 20 years. Dividend yield is a measure of the return you get from the annual dividends paid by a company, or in this case, the companies in an index. When dividend yields are on the high side, it’s a sign of stress in the stock market.

Another way to assess the dividend yield on stocks is to compare them to the return on a safe investment, for example the yield on the 10-year Government of Canada bond. These days, the yield on this bond is about 2 per cent.

Research by Mr. Baskin’s firm shows that over the past 60 years, the dividend yield on the composite index has been a little less than half of the 10-year bond yield. Between 1960 and 2007, the index dividend yield never rose above 70 per cent of the interest rate on 10-year bonds.

All of these numbers suggest to Mr. Baskin that dividends have never been more attractive, compared to interest rates, than they are today. “Things in the economic world always revert to the mean,” he said. “The mean is not a TSX with a dividend yield that high. It’s so far off the charts, it’s like a black swan event.”

The past year has provided a classic example of what people hate about investing in stocks. We started well, and in February the composite index broke above 14,000 for the first time since 2008. It was pretty much onward and downward from there, although there have been euphoric moments like last week’s massive one-day surge of 4 per cent.

Mr. Baskin believes the market outlook for next year depends a lot on what happens in Europe, where negotiations to address the massive debts of some countries have been continuing for months without resolution. But he also sees some signs here in North America that could have a positive impact on stocks.

For one thing, the large-size U.S. companies that make up the S&P 500 stock index reported record-high earnings in the third quarter of the year. And, several of Canada’s big banks have reported excellent earnings for the fiscal year ended Oct. 31. How have bank stocks responded? Shares of four of the Big Six banks are down over the past month.

“People have an aversion to being burned again,” Mr. Baskin said. “But you could easily see a situation where we catch a 10-per-cent updraft in the market over a period of four or five weeks.”

I know what you’re thinking: What about the risk that the market could fall 10 per cent over a short period?

“I suppose it could happen,” Mr. Baskin said. “What I tell my clients is, you’re being paid a lot for taking that risk.”

This brings us to that 2.8-per-cent dividend yield on the S&P/TSX composite index and the much higher yields available from bank shares and other blue chips. Things could still get uglier for the stock markets, but one thing we know is that these dividend yields are a great buy.

________

The firm Baskin Financial Services says the 2.8 per cent dividend yield on the S&P/TSX composite index is the second-highest in the past 20 years. Here are 12 of the highest-yielding big blue chips in the index with yields at or above that level:

Company

Ticker

Dividend Yield (%)

Avg. dividend yield at previous fiscal year end (%)

Royal Bank of Canada

RY-T

4.4

3.7

Toronto-Dominion Bank

TD-T

3.7

3.5

Bank of Nova Scotia

BNS-T

4.3

3.6

Bank of Montreal

BMO-T

4.7

4.7

BCE Inc.

BCE-T

5.1

5.0

TransCanada Corp.

TRP-T

3.9

4.2

Enbridge Inc.

ENB-T

2.8

3.0

Cdn Imperial Bank of Commerce

CM-T

5.0

4.5

Husky Energy

HSE-T

4.7

4.5

Thomson Reuters

TRI-T

4.7

3.1

Manulife Financial

MFC-T

4.6

3.0

Rogers Communications

RCI.B-T

3.8

3.7

Source: Globe Investor Gold



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