John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
The selloff that started in the oil patch has since spread to banks and other sectors, fraying the nerves of many income investors.
But dividend fund manager Les Stelmach isn't panicking.
With stock prices off sharply amid recession fears, China worries and turmoil in Greece, he's been finding good values – particularly among banks and energy-related companies.
"You look for businesses that can be profitable through the cycle," the co-manager of the Franklin Bissett Dividend Income Fund and Franklin Bissett Canadian Dividend Fund says. "Within financials and energy, from our perspective, the prospective returns are pretty good."
When Mr. Stelmach is considering stocks for his dividend funds, the yield is just one consideration. He also looks for a strong capital position, good potential for growth and a competitive advantage that will serve the company well in the long run.
With the current market slump, many such stocks are now selling at attractive valuations that could lead to solid returns when the environment improves, he says.
Yield Hog asked Mr. Stelmach to discuss five of his current holdings. Remember that there are risks with any stock, so be sure to do your own due diligence before investing in any security.
Canadian Imperial Bank of Commerce
Price: $92.40, up 57 cents
Yield: 4.7 per cent
Franklin Bissett owns all of the big Canadian banks, but Mr. Stelmach is especially keen on CIBC because of its higher-than-average exposure to retail banking – a stable and highly profitable business. CIBC's yield is the highest of the Big Five and its share price is down nearly 15 per cent from its 52-week high in early December.
Canadian banks in general are benefiting from growth in wealth management and insurance, and if interest rates rise, lending margins should also improve. Another plus: Canadian banks are well capitalized after fortifying their balance sheets during the financial crisis of 2008-09, which puts them in a good position to ride out a downturn.
Price: $34.65, down 14 cents
Yield: 4.4 per cent
Enbridge Income Fund already pays a juicy yield, and its dividend is poised to increase even more following a proposed "drop-down" of oil pipeline and renewable energy assets from Enbridge Inc. The $30.4-billion transaction (including $11.7-billion of debt) is expected to close in September, after which Enbridge Income Fund has pledged to raise its dividend by 10 per cent, with a similar increase expected in early 2016 and each year thereafter through 2019.
"Most of the assets going into ENF is the mature stuff, it's already in operation, it's fully contracted, its pretty safe stuff," Mr. Stelmach says. "Knowing that Enbridge is still going to own a lot of ENF, they [Enbridge] have a clear incentive to make sure it's successful."
Brookfield Renewable Energy Partners
Price: $36.60, down 6 cents
Yield: 5.6 per cent
Brookfield Renewable Energy operates about 250 primarily hydroelectric power plants in North America, South America and Europe that collectively produce enough electricity to power four million homes. The current yield is attractive, and the dividend will almost certainly continue to grow. The partnership, which declares distributions in U.S. dollars, aims to raise its payment by 5 to 9 per cent annually. With the backing of parent Brookfield Asset Management, "there is a lot of opportunity to grow by acquisitions" not just in North America but internationally, Mr. Stelmach says.
Hydro is a cheap source of power with high margins, and most of the output is contracted on a long-term basis, providing predictability of cash flows and distributions.
Price: $3.79, up 8 cents
Yield: 8.4 per cent
Horizon North Logistics provides work force accommodations to oil and gas, mining, hydro and other projects in remote areas. The stock price took a big hit with the slump in commodities but has since rebounded on expectations that Horizon North will win significant business tied to proposed liquefied natural gas projects in British Columbia.
"The scale of the workers required will be substantial," Mr. Stelmach says. Horizon North's yield is definitely on the high side, but he thinks the company will maintain the dividend as long as "things get no worse than they are today. If things get significantly worse, then they'll probably have to look at it."
Price: $15.06, down 17 cents
Yield: 7.2 per cent
As the owner of about three million acres of land, Freehold collects a royalty from companies that drill for oil and gas on its properties. It's an attractive business model, Mr. Stelmach says, because Freehold doesn't pay operating or capital costs. The company is still exposed to commodity markets, however: Faced with plunging crude oil prices, Freehold in January slashed its monthly dividend by 36 per cent – to 9 cents from 14 cents. Even after the cut, the stock yields more than 7 per cent, but the dividend is "pretty safe," he says. "They are well capitalized, oil prices are higher now than they were when they cut the dividend, the debt level is quite low and they've been striking more deals so there should be more revenue coming in."
John Heinzl