For dividend investors, it's a brave new world.
After several years of sluggish growth and falling interest rates, the investing environment has been turned on its head: Growth is picking up and interest rates are once again on the rise.
The reversal has been especially dramatic in Canada, where the economy has been growing so quickly – it expanded at a scorching annual pace of 4.5 per cent in the second quarter – that the Bank of Canada has raised its benchmark interest rate twice in the past few months, with more hikes possible.
For portfolio managers such as Darren Sissons, the new environment presents both challenges and opportunities.
"The market is transitioning towards a more growth-oriented theme," says Mr. Sissons, a partner with Campbell Lee & Ross Investment Management. While that bodes well for certain sectors such as banks, it is putting pressure on "slow-growing, big dividend-paying behemoths" including telecoms and consumer staples, he says.
Although valuations are generally on the high side, his firm is still finding "pockets of value," he says. Campbell Lee & Ross – which manages about $300-million on behalf of high-net-worth individuals and institutions – focuses on companies with attractive valuations, good growth prospects, strong balance sheets and rising dividends.
Here are five dividend stocks the firm likes right now. Remember to do your own due diligence before investing in any security.
Bank of Nova Scotia (BNS - TSX)
Yield: 4.1 per cent
Banks benefit from rising interest rates because it improves their net interest margin – essentially, the difference between what they make on loans and what they pay out on deposits. With about two-thirds of Bank of Nova Scotia's loan book subject to floating interest rates, the bank stands to benefit immediately from the Bank of Canada's two recent hikes. Furthermore, the recent rise in rates "will progressively drive earnings higher for the longer-dated loan maturities," Mr. Sissons says. Higher earnings, in turn, should support continued dividend increases for Scotiabank.
Enbridge Inc. (ENB - TSX)
Yield: 4.8 per cent
Pipeline operator Enbridge is "a critical cog of North American energy infrastructure," Mr. Sissons says. Yet, the share price has skidded about 10 per cent this year, hurt by low oil prices and concerns about Enbridge's long-term growth outlook. But Mr. Sissons says another factor may be at play: the recent $37-billion acquisition of U.S.-based Spectra Energy Corp. that was paid for with Enbridge common shares. "Spectra shareholders have since been net sellers of their Enbridge shares and that, coupled with a recent earnings miss, has temporarily provided an attractive entry point for the stock," he says. Even as its shares are in a slump, Enbridge has said it expects to raise its dividend by 10 per cent to 12 per cent annually through 2024.
Open Text Corp. (OTEX - TSX)
Yield: 1.7 per cent
Shares of Open Text, which sells enterprise information management software, have tumbled about 17 per cent from their high in May, hit by concerns about the rapid pace of acquisitions and the company's elevated debt level, Mr. Sissons says. "However, the company generates substantial free cash flow and should reduce its debt levels relatively quickly," he says. The modest yield may not turn many heads, but Open Text has boosted its dividend – which is paid in U.S. dollars – at a compound annual rate of about 15 per cent since it initiated a dividend in 2013. What's more, the company maintains a conservative payout ratio, targeted at about 20 per cent of operating cash flow for the trailing 12 months.
SNC-Lavalin Group Inc. (SNC - TSX)
Yield: 2 per cent
For years, the only headlines SNC-Lavalin made were related to the bribery scandal that was engulfing the company. But with that crisis now receding, the construction and engineering giant's stock is up about 37 per cent since the start of 2016 – and there are likely more gains to come, Mr. Sissons says.
SNC's recent acquisition of WS Atkins PLC, in particular, "vaults the company into the upper echelons of the global construction industry. The backlog [of projects] is solid and the company will increasingly benefit from the increase in global infrastructure spending that governments across the globe are now embracing," he says. That could lead to further increases in the dividend, which has grown at an annualized rate of 4.4 per cent over the past five years.
Kone OYJ (KNYJF - U.S. OTC)
Price: $56.40 (U.S.)
Yield: 2.91 per cent
Based in Finland, Kone is a global supplier of elevators, escalators and moving walkways. With a leading position in China and India and a solid presence in Europe and the Americas, the company is benefiting from the urbanization trend, particularly in emerging markets. With about half of revenue coming from product sales and half from maintenance and repairs, the company benefits from a recurring cash flow stream. "The company has generated an excellent financial performance over the last 15 years as net income has grown at a compound annual rate of 14.3 per cent," Mr. Sissons says. The company typically raises its dividend in January and also occasionally pays a special dividend.