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Inside the Market Why dividend stocks were outperformers in a week of market turbulence

If a dull stock with a dividend yield above 5 per cent looks very appealing in a world defined by an unpredictable U.S. President and the threat of an escalating trade war with China, you're probably not alone.

During this week's return to stock-market turbulence, dividend stocks have outperformed the broader market, suggesting an important shift in investor sentiment from the downturns that defined market activity earlier this year.

On Friday, the S&P 500 fell 2.1 per cent and Canada's S&P/TSX Composite index fell 1.1 per cent, deepening a rout that began on Thursday when U.S. President Donald Trump announced tariffs on Chinese imports.

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But is this a rehash of the volatility that flared up in February? Probably not.

While dividend stocks were pummelled earlier this year amid concerns about higher inflation and rising bond yields, they are now showing signs of stabilizing as they appeal to investors more worried about Mr. Trump's next announcement.

Let's take a deeper look at the two downturns.

The S&P 500 fell 10.2 per cent between late January and early February, in a bout of turbulence that included a shocking 4.1-per-cent decline on Feb. 5 and a 3.8 per cent decline on Feb. 8. The overall decline marked an official correction.

But the dividend-heavy utilities sector was hit considerably harder. From November to February, these stocks fell 16.3 per cent. Similarly, the real estate sector fell 13.1 per cent.

In Canada, utilities fell as much as 12.8 per cent between November and February, while telecom stocks, real estate investment trusts (REITs) and pipelines were also whacked.

In a world of rising rates and strong economic activity, even hefty dividends from economically defensive companies have limited appeal – especially when government bonds offer higher yields of their own.

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But this week's downturn was different, particularly on Thursday. Far from coinciding with upbeat economic news, the market's decline was driven by U.S. tariffs – and Chinese retaliation.

"These are the most significant of the series of trade measures undertaken by the administration so far. If they mark the start of an unravelling of the current rules-based architecture, the U.S. and global economy will be significantly negatively affected," Moody's Investors Service warned in a note.

Bond yields declined as investors flocked to safety of fixed income, making dividends look more attractive. The yield on the 10-year U.S. Treasury bond fell to 2.8 per cent, taking it back to levels seen in early February, despite the U.S. Federal Reserve raising its key interest rate this week by a quarter of a percentage point.

To be sure, dividend stocks haven't exactly rallied into this week's concerns.

But utilities and real estate stocks have delivered noticeably smaller declines.

On Thursday and Friday, the S&P 500 fell a total of 4.6 per cent, sending the benchmark index under water for 2018. The S&P/TSX fell nearly 1.8 per cent on Thursday, for its biggest decline in about 18 months.

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But Canadian and U.S. utilities rose on Thursday, while U.S. real estate stocks fell just 0.4 per cent. On Friday, Canadian and U.S. utilities and real estate stocks declined – but the dips were far shallower than the overall market.

Canadian utilities, for example, fell just 0.4 per cent, next to a 1.6-per-cent decline for financials and a 1.7-per-cent decline for industrials.

Perhaps stocks with generous cash payouts are being recognized as hot opportunities. Consider these examples:

Telecom giant BCE Inc., whose share price has fallen 12 per cent since November, now yields 5.5 per cent. That's close to a record high for data going back to 2000.

Choice Properties REIT, which will be Canada's largest REIT after it finalizes its takeover of Canadian Real Estate Investment Trust, yields 6.4 per cent after a 15.5-per-cent decline in its unit price since November.

Halifax-based electricity generator Emera Inc. yields 5.5 per cent. The shares have fallen 17.3 per cent since November.

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And Enbridge Inc. (full disclosure: I own this stock), whose share price has slumped 21 per cent in 2018, now yields a remarkable 7 per cent, up from a yield of about 3 per cent three years ago.

High yields can reflect risks that dividend growth could falter, which is certainly a concern weighing on Enbridge and Choice Properties. But in all four of the examples above, companies have been raising their cash payouts by an average of nearly 9 per cent over the past three years, implying financial confidence. This confidence will be a valuable asset should Mr. Trump continue to re-make U.S. trade policy.

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