Chart with the word oops on it.
I wrote previously that I do not expect a significant rise in domestic interest rates but that doesn't mean there won't be some white-knuckle periods for dividend and income investors.
The five-year government of Canada bond yield has climbed from 92 basis points in early June, 2017, to over 150 basis points currently. As a result, the major dividend-paying sectors of the S&P/TSX composite index – utilities, real estate, and telecom services – have all fallen more than one per cent in the past 30 days.
We are still a ways away from bond yields high enough to truly threaten the attractiveness of most dividend stocks. The average yield in the S&P/TSX Real Estate Investment Trust (REIT) index, for instance, is 4.3 per cent higher than the five-year bond yield.
According to Bloomberg estimates, however, there is a 71.3-per-cent probability that the Bank of Canada will raise rates again on Oct. 25. This would both push bond yields and corporate financing costs higher – a particular problem for debt-intensive income sectors like utilities, REITs and telecoms – and further cut into the advantages for dividend stocks over growth stocks.
The five-year bond yield dropped from 4.75 per cent in June of 2007 to less than 50 basis points in early 2016. This trend formed a rising tide that lifted all income-generating boats. These boats are not all set to sink as interest rates rise – the numerous benefits of regular dividend and distribution payments remain – but for now it looks like the easy money has already been made. Investors will have to be more selective about what they own in dividend sectors to avoid weak performance.
-- Scott Barlow is The Globe's in-house market strategist
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Stocks to ponder
Jean Coutu Group Inc. The tougher things get for Jean Coutu Group Inc., the more it makes sense for the Quebec-based drugstore chain to find a partner – and things are definitely getting tougher. The latest challenge comes from the Quebec government, which announced that it will slash its spending on generic drugs by about 35 per cent, saving the government $1.5-billion over five years. So, should Jean Coutu go it alone or look for a partner? David Berman examines this issue.
Waste Connections Inc. The company will be releasing its second quarter financial result next week. If history repeats itself, the share price may rebound from its current downtrend. The stock price has rallied immediately after reporting its financial results in eight of the past nine quarters. There are 13 buy recommendation on the stock with a 17-per-cent price return anticipated over the next year. Jennifer Dowty explains.
ATS Automation Tooling Systems Inc. This stock appeared on the positive breakouts list earlier this week. Interestingly, on Tuesday, over 3.3-million shares traded, which is well above the three-month historical daily average trading volume of approximately 250,000 shares. Despite this unusually high volume, the stock price only declined by a few cents, suggesting there were buyers in the stock to offset to the sellers. Last quarter, the stock price soared nearly 8 per cent after the company reported better-than-expected top line results and several analysts upgraded the stock. Jennifer Dowty explains.
Exchange Income Corp. The headline numbers at Exchange Income Corp. were impressive in the second quarter, with revenue and two of the company's earnings measures easily exceeding expectations. Bay Street applauded, with analysts reiterating their buy recommendations and raising their target prices to imply, on average, a 45-per-cent return on the company's shares. Such things do not end a battle with short-sellers, however, and the company's fight with bare-knuckled Marc Cohodes will continue. Mr. Cohodes, presented with the numbers, chooses to focus on other elements of the company's results, particularly its continued burning of cash and a new disclosure that its aircraft-parts subsidiary is allowing its CEO to invest alongside it for personal profit. David Milstead explains.
The Rundown
The TSX Venture Exchange, cast in a new light
A recent survey of Canadian investors by PricewaterhouseCoopers LLP found a healthy appetite for initial public offerings during the first half of 2017. In contrast to the same period last year when there were zero IPOs, the first six months of 2017 saw 16 new issues for a total market value of $2.9-billion. If your risk profile permits investment in the illiquid and information-deficient sector of private equity, but your broker isn't providing access, then I have a suggestion: Check out the stocks listed on the TSX Venture Exchange. They will likely have a longer track record, better financial disclosure through the System for Electronic Document Analysis and Retrieval (SEDAR) and a board of directors that is familiar with the current thinking on governance. Robert Tattersall explains.
Why Canadian investors should be wary of emerging-markets hype
Merrill Lynch strategists are extremely bullish on emerging market stocks but this optimism is based on a U.S. perspective. For Canadian investors, shifting investment assets from domestic to developing world stocks is a more complicated, and possibly unnecessary, decision. Scott Barlow explains.
David Rosenberg: Here's how high I think the loonie will climb before the next pullback
The net speculative short position on the Canadian dollar has collapsed from 99,736 contracts at the end of May to 5,736 as of July 11. Over this time, the loonie rallied 6.6 per cent – and remarkably, there is still a lingering, albeit small, net short position. And what is interesting is that the movement has been three parts short-sellers running for cover to one part speculators actually going long. All that has really happened is that the negative positioning has unwound – the lack of a bullish thrust is actually good news because this is what could well take the loonie up even further. David Rosenberg explains.
Canada is now getting its own cyber security and gender diversity ETFs
The roster of exchange-traded funds in Canada, already tallying more than 500, keeps growing. ETF player Evolve Funds Group Inc. is expanding its product shelf to incorporate several niche products new to the Canadian market, including ETFs that invest in gender diversity, cyber security and the next generation of automobiles. Clare O'Hara explains.
What Leon Frazer's Ryan Bushell is buying and selling
Rising interest rates are a signal of renewed confidence in the Canadian economy and could bode well for financial and energy stocks, says Ryan Bushell, vice-president and portfolio manager at Leon Frazer and Associates. Mr. Bushell is betting on certain stocks in those sectors to help boost returns for his retail investor clients. The Globe and Mail spoke with Mr. Bushell recently about what he's buying and selling – and the consumer stock his firm wishes it bought when it was pitched by a new hire back in 2013. Brenda Bouw interviews Mr. Bushell.
Others
The week's most oversold and overbought stocks on the TSX
Q&A: Cory O'Krainetz from Odlum Brown on stocks with upside potential
Friday's Insider Report: Companies insiders are buying and selling
Thursday's Insider Report: Companies insiders are buying and selling
Wednesday's Insider Report: Companies insiders are buying and selling
Number Crunchers
Thirteen U.S. small-cap stocks poised to outperform
These 13 Canadian companies are growing at a reasonable price
A top-down search for Canadian value investments
Ask Globe Investor
Q: We recently sold our house and will be renting for the near future in the Toronto area. I now have a sizeable amount of cash and I am thinking I will pay half the mortgage on our investment property and invest the balance. Is this a bad time to dump a lot of money into the market?
A: Let me get out my crystal ball … oops, sorry, it seems to be broken.
The truth is I have no idea what the market will do next week, next month or next year. Nobody does. The only thing I'm comfortable predicting is that, over the long run, the market will rise.
Rather than worry about the market's short-term direction, I suggest you focus on building a properly diversified portfolio. You can accomplish this with low-cost index mutual funds, exchange-traded funds or - if you have the time and knowledge - a portfolio of individual companies.
I'm a big fan of stocks that pay dividends and raise them regularly. One reason is financial: studies show that dividend-growing stocks have produced solid returns historically. Another reason is behavioural: When the stocks or funds you own pay a regular dividend, and that dividend grows, it's a powerful incentive to stay invested. As the old saying goes, it's time in the market, not timing the market, that creates wealth.
If putting a big chunk of cash to work all at once makes you nervous, you could always invest your money in stages - a little bit now, a little more a few months from now, and so on. If the market goes for a tumble, you'll be glad you didn't jump in with both feet. However, studies have shown that the lump sum approach produces the best results, on average; that only makes sense, given that the market's general direction is up.
Whatever you decide, it's important to remain focused on the long run. Market setbacks can't be avoided; they are a normal part of investing and you should not let them derail your plan. Stay diversified, collect your dividends, reinvest them if you don't need the cash - and let time take care of the rest.
-John Heinzl
Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.
What's up in the days ahead
Bonds are a non-negotiable part of a well-diversified portfolio, but they're struggling right now. Count on this continuing as long as there's an expectation of high rates in Canada. Rob Carrick on Saturday will present a seven-point survival guide for bond investors in our new rising-rate world.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Gillian Livingston