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Cyclical stocks are on this dividend investor’s watch list

Mat Litalien

Occupation

Manager at a health-care facility.

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The portfolio

Includes Toronto-Dominion Bank, Telus Corp., Pembina Pipeline Corp., Mandalay Resources Corp., TransAlta Renewables Inc., BMO Equal Weight REITs Index ETF, Aflac Inc., Intel Corp., Coca-Cola Co. and Wells Fargo & Co.

The investor

When he started investing 10 years ago, Mr. Litalien bought stock recommendations off websites and message boards. It didn't go well. For one thing, it seemed to him that some tipsters "get paid to push a certain equity."

Mr. Litalien now researches companies before buying their stocks. He also has an investment plan that guides him toward stocks consistent with his risk tolerance and investment goals.

How he invests

"I have two goals: invest for retirement and my children's education," Mr. Litalien says. This means focusing on long-term returns and moderate risk.

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Mr. Litalien finds that stocks with rising dividends provide the answer. He particularly likes their "predictability." He feels more certain about receiving a return from dividend stocks (via their streams of rising income) than non-dividend stocks offering variable capital gains. The return may not necessarily be higher over the long run, just more assured and easier on the nerves.

His portfolio is 100 per cent in equities. This kind of risk taking is appropriate, as York University professor Moshe Milevsky has recommended in his books, when an investor is enrolled in a defined-benefit pension plan – as Mr. Litalien is. The pension will function like a large bond in his retirement, providing regular income for as long as he lives.

About 90 per cent of his equity position consists of dividend stocks. The remaining 10 per cent is split evenly over real estate investment trusts (REITs) and commodity stocks. This provides some diversification.

He buys dividend stocks when they are value priced. Criteria used for judging valuation include the price-to-book-value and price-to-earnings ratios.

Mr. Litalien is not averse to owning cyclical stocks with dividends. The sector has gotten a bad rap in the wake of recent dividend cuts, but there are some cyclicals that didn't overextend themselves. And now many are value priced because of their sector's woes.

Take auto-parts maker Magna International Inc., which is on Mr. Litalien's buy list. The price-to-earnings ratio is 30-per-cent below its five-year historical average, and just 19 per cent of cash flow finances the dividend (which grew by more than 35 per cent over the past five years).

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Best move

He built up a position in insurer Aflac Inc. after the financial crisis; it is now up more than 100 per cent.

Worst move

"I bought Goldcorp near its high and finally sold last year, taking a significant loss."

Advice

Before jumping into the stock market, develop an investment plan, suggests Mr. Litalien. Specify your investment goal, expected rate of return, risk tolerance, types of investments, rebalancing rule and other details.

Want to be in Me and My Money? Contact Larry MacDonald at mccolumn@yahoo.com or his website

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