Canadian investors considering blindly buying the highest yielding stocks in the S&P/TSX composite might instead consider just lighting the money on fire. It's quicker, and the effects on portfolio returns are often very similar.
Buying stocks solely because of higher yields is a terrible investment strategy as the two accompanying tables highlight.
The first table shows the 15 highest yielding TSX stocks at the end of 2014 and their year-to-date total return so far in 2015. For every success story such as Just Energy Group Inc.'s 58.6 per cent total return, there are numerous stocks with abysmal returns despite the high dividend yields. The average year-to-date total "return" for the top yielding TSX stocks has been a painful 22.7 per cent loss.
| Company | Ticker | Div. Yield % as of Dec. 31, 2014 | Total Return % Dec. 31, 2014 to Present |
|---|---|---|---|
| Surge Energy Inc. | SGY-T | 16.30 | -20.86 |
| Canadian Oil Sands Ltd. | COS-T | 13.44 | -13.21 |
| Pengrowth Energy Corp. | PGF-T | 13.11 | -67.18 |
| Bonavista Energy Corp. | BNP-T | 11.51 | -64.16 |
| Pacific Explor. & Prod. | PRE-T | 10.53 | -74.41 |
| Crescent Point Energy Corp. | CPG-T | 10.26 | -28.73 |
| Enerplus Corp. | ERF-T | 9.65 | -35.33 |
| Dream Global Real Estate Inv | DRG.UN-T | 9.34 | 5.21 |
| Norbord Inc. | NBD-T | 9.29 | 11.88 |
| Dream Office Real Estate Inv | D.UN-T | 8.91 | -21.95 |
| Freehold Royalties Ltd. | FRU-T | 8.79 | -34.98 |
| Bonterra Energy Corp. | BNE-T | 8.64 | -42.98 |
| Just Energy Group Inc. | JE-T | 8.22 | 58.63 |
| Cominar Real Estate Inv-Tr U | CUF.UN-T | 7.90 | -13.26 |
| Artis Real Estate Investment | AX.UN-T | 7.62 | 1.33 |
| Average Return | -22.67 |
The energy sector gets the lion's share of blame for the poor performance of high-yielding stocks this year, but investors should remember that at the end of last year the investment risks in energy stocks were not clearly apparent. The S&P/TSX energy sector had ended 2014 on a high note, rallying 15 per cent in the last two weeks of the year in the wake of the Talisman Energy acquisition. Many investors must have felt they were getting high dividend payouts in a sector that was improving, only to see their investments crushed by markets through this year.
This investor tendency – buying high-dividend stocks and underestimating the investment risks – is called "reaching for yield" and it rarely ends well in the mid-term.
The second table shows that the performance for the highest-yielding TSX stocks from the end of 2013 wasn't much better than in the first case. Again, the table includes the 15 highest yielding stocks in the S&P/TSX composite, only this time we show the performance, including dividend payments, from Dec. 31, 2013, to the present (Nov. 25).
As with the first table, there are far more losers than winners. The average stock performance for these stocks was a 12.1 per cent loss for the approximately 23 months.
| Company | Ticker | Div. Yield % as of Dec. 31, 2013 | Total Return % Dec. 31, 2013 to Present |
|---|---|---|---|
| Just Energy Group Inc. | JE-T | 11.05 | 39.91 |
| Dream Global Real Estate Inv | DRG.UN-T | 9.50 | 16.87 |
| Labrador Iron Ore Royalty Co | LIF-T | 8.73 | -56.54 |
| Transalta Corp | TA-T | 8.61 | -52.03 |
| Cominar Real Estate Inv-Tr U | CUF.UN-T | 7.81 | -5.40 |
| Dream Office Real Estate Inv | D.UN-T | 7.77 | -26.31 |
| Surge Energy Inc | SGY-T | 7.70 | -52.76 |
| Freehold Royalties Ltd | FRU-T | 7.60 | -39.56 |
| Pengrowth Energy Corp | PGF-T | 7.31 | -80.20 |
| Artis Real Estate Invest. | AX.UN-T | 7.27 | 3.64 |
| Norbord Inc | NBD-T | 7.09 | -6.50 |
| Extendicare Inc | EXE-T | 7.04 | 63.60 |
| Canadian Oil Sands Ltd | COS-T | 7.01 | -51.59 |
| Veresen Inc | VSN-T | 7.00 | -16.88 |
| Enercare Inc | ECI-T | 6.98 | 82.45 |
| Average Return | -12.09 |
There are a few winners among the stocks listed in the tables but overall, an important investment rule applies: The higher the yield, the higher the risk of portfolio losses. This is not the case in every instance (I refuse to believe markets are entirely efficient in the wake of the financial crisis), but the rare bargains among dividend stocks do not last long, particularly in an era where demographic factors are creating such insatiable demand for income of any kind.
Markets have adjusted somewhat to lower commodity prices so investors can reasonably expect less carnage in dividend-paying resource stocks next year. However, slower economic growth in Canada that could negatively affect companies' ability to maintain payouts, plus the potential for rising interest rates and bond yields present new risks for income-oriented investors.
Merrill Lynch chief quantitative strategist Savita Subramanian suggests that companies with growing dividends, rather than those with the current highest yields, is the correct strategy for 2016. This is a topic we'll cover in more detail in future columns.