It looks like 2005 could shape up as the year of the dividend.Major investment dealers say in forecast after forecast that investors should look to dividend stocks this year as a way of playing defence in what is widely expected to be a soft year for stocks. Strategists like the classic safe sectors such as utilities, telecom, financials and consumer staples, but maybe you'd like to take a somewhat more aggressive stance.
One way to do this is to put a Canadian spin on the successful Dogs of the Dow strategy, where you buy the 10 highest yielding stocks on the Dow Jones industrial average. The Dow dogs have been, well, dogs lately because of troubles at blue-chip giants such as Merck and General Motors, but they have historically done well against the Dow itself and the S&P 500 index.
There are a couple of ways to build a portfolio comprising the dogs of the TSX. You could just buy the 10 highest yielding stocks in the S&P/TSX 60 index of behemoth blue chips, but then banks and pipeline stocks would account for seven of your holdings. Not much diversification there.
A more speculative but potentially more rewarding approach would be to look at the highest yielding stocks in each of the 10 stock groups of the S&P/TSX composite index, plus three subgroups. Owning these stocks would offer solid dividend yields for the most part, plus the potential for capital gains. Also, there's the diversification benefit of being exposed to a wide variety of economic sectors.
There are really two classes of dog stocks on the Toronto Stock Exchange, one being well performing stocks that happen to offer the best dividend yields in their sector. The other class is the true dogs, stocks that have been driven down in price on concerns about one thing or another. Share prices and dividend yields move in opposite directions, so a falling price means a higher yield.
The Dogs of the Dow strategy works because the stocks listed in the Dow Jones industrial average are proven blue chips. Looking for high-yielding dogs on the TSX requires more care because some of these companies are speculative investments. Let's take a sector-by-sector look at your options.
Consumer discretionary: Torstar Corp.
Torstar is a classic dog. Thanks to a big decline in its share price last year, this publisher of newspapers and romance novels offers the highest yield in its sector by a good margin over Hudson's Bay Co.
Consumer staples: Rothmans Inc.
Sure, cigarettes are nasty things. But just as they produce all those carcinogens and litigation risk, they also generate the steady profits that allow Rothmans to finance its bounteous dividend. Molson offers the next highest yield at just 1.7 per cent.
Energy: PetroKazakhstan Inc.
The former Hurricane Hydrocarbons is the best of a mediocre lot of dividend-payers in the energy sector -- that's one caveat with this stock. The other is that its price soared in the past 12 months. If oil prices were to come down sharply, this stock could give back some of its gains.
Financials: Laurentian Bank of Canada.
No, this wouldn't be my choice either if I were looking for a bank stock to buy. But from a yield point of view, Laurentian offers a 1.2-percentage-point premium over the next highest bank, Canadian Imperial Bank of Commerce. Laurentian's share price has been on a three-year downward trend, but it's a favourite of value-investing specialist Irwin Michael, who has highlighted it on his website, Value Investigator (http://www.valueinvestigator.com).
Real estate: Brookfield Properties.
There's not much selection in the real estate sub-group -- just Brookfield and MI Developments Inc., neither of which offer a decent yield. Here's a thought -- why not substitute the highest-yielding real estate investment trust in the S&P/TSX capped income trust index. That would be InnVest REIT, yielding 9.7 per cent.
Health care: MDS Inc.
The health care group is a dead loss for dividends. MDS is the only dividend-payer and its yield is microscopic. This might be acceptable if the stock had any life at all, but the reality is that MDS has been in a tailspin lately.
Industrials: Russel Metals.
