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Why Trump has just put dividend stocks on sale

Defensive stocks, now on sale, may offer a better approach no matter what happens.

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Stocks that offer stable profits and big dividends are getting pummelled this week, and the selloff looks like a buying opportunity for anyone with a soft spot for ketchup, diapers and WiFi.

Some of the biggest names in consumer staples, utilities and telecom – nearly bulletproof during times of uncertainty – have been hit hard over the past two days, even as the broader stock market rallies toward new highs.

Procter & Gamble Co., the $220-billion (U.S.) consumer products giant that owns brands such as Tide and Pampers, was down 3.5 per cent on Thursday, following a 1.8 per cent dip on Wednesday.

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Tobacco producer Altria Group Inc. and ketchup-maker Kraft Heinz Co. have fallen 6 per cent each over the past two days.

Many key Canadian names such as telecom giant BCE Inc., convenience store operator Alimentation Couche-Tard Inc. and energy distributor Fortis Inc. have also been swept into the sell-off, raising questions about what's driving the action and how long the moves will persist.

At first glance, the dips look puzzling. These defensive stocks, which tend to deliver steady profits, look terrific when uncertainty abounds. The rise of Donald Trump to U.S. president-elect – with remarkably few qualifications for the job – has ratcheted up the uncertainty over everything from international trade agreements to geopolitical security.

"In one of the most extraordinary regime changes in generations, investors need to remain alert to developments," Stéfane Marion, chief economist and strategist at National Bank Financial Inc., said in a note. "We doubt very much that the transition to a Trump presidency will be business as usual for Mr. Market."

But the bond market is pushing aside notions of uncertainty. Bond yields have surged over the past two days as bond prices have declined. The yield on the 10-year U.S. Treasury bond has risen above 2 per cent, its highest level since January, after a particularly big jump on Wednesday.

The yield on the Government of Canada five-year bond has also been rising, hitting 0.87 per cent on Thursday, up from just 0.66 per cent at the start of the week.

The bond market appears to be gearing up for more inflation – and, potentially, interest rate hikes – if U.S. budget deficits soar and new trade restrictions translate into higher import prices under a Trump administration. The market may be trying to contemplate stronger economic growth and the future of Federal Reserve chair Janet Yellen as well.

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What does this have to do with ketchup? If stable, dividend-generating stocks shone when bond yields were low, they look less appealing when yields are rising and the stock market embraces a brighter future for the economy. Defensive stocks are being tossed aside in favour of steel producers, construction firms and biotech researchers.

But this knee-jerk reaction to Mr. Trump's victory may be fleeting. David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates, said in a note that if the new-found hopes for U.S. growth and inflation play out as they have in Canada and Japan, "then Wednesday's euphoria will morph into something closer to impatience and disappointment."

Mr. Rosenberg added: "I'm not buying into the 'nirvana' inflationary growth forecast that Mr. Market is laying down until the jibber-jabber turns into something durable."

Bright minds in Europe, Japan, Canada and the United States have struggled for years to invigorate sluggish economies following the financial crisis. The belief that Mr. Trump, a businessman without any experience in public office, can succeed even before his inauguration looks like an outlandish bet.

Defensive stocks, now on sale, may offer a better approach no matter what happens.

Procter & Gamble is diversified across regions and could fill a supermarket with its brands. It comes with a 3.2 per cent dividend yield and is expected to increase its profit-per-share by 6 per cent next year. Kraft Heinz has a 2.9 per cent yield and counts Warren Buffett's Berkshire Hathaway as its biggest shareholder. Tobacco companies sport steady growth and even bigger dividends.

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In Canada, BCE has a 4.7 per cent dividend yield and is expected to increase its profit by 4 per cent next year. Fortis, diversified across Canada and the United States, has a 3.9 per cent yield.

Investors aren't clamouring for defensive stocks right now. But that's when they look their best.

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