Well, that was fun while it lasted.
After going virtually straight up for the past few years, many dividend stocks have suddenly lost their mojo. Fortis and Telus, for example, are down 5 per cent from their highs, while Enbridge and Canadian Utilities have skidded more than 8 per cent.
I feel your pain, folks. I own these and other dividend stocks personally and in my Strategy Lab model portfolio. The good news is that my model portfolio is still up about 12 per cent since its inception in September. The bad news? At the end of April it was up more than 15 per cent.
A couple of things are going on here. First, the dividend rally caused some valuations to get stretched, leaving the stocks vulnerable to a pullback. Second, as the economy has improved, 10-year U.S. and Canadian bond yields have risen by about half a percentage point, prompting investors to take profits in interest-sensitive sectors, such as pipelines, utilities and telecoms.
That said, I haven't sold anything and don't plan to. My strategy is to build a portfolio of high-quality companies whose dividends will grow for many years to come. Short-term changes in valuation, interest rates and the economy are beyond my control; I am a buy-and-hold investor, not a trader.
In fact, lower prices have a silver lining for dividend investors who are still accumulating assets. Because yields rise when prices fall, investors get more income for every dollar they spend. If the current pullback continues, some bargains could emerge.
With that in mind, I talked to four dividend portfolio managers about how they're playing the pullback. Their comments have been edited and condensed.
Tony Demarin, president, BCV Asset Management, Winnipeg
If interest rates continue to tick higher, you're likely going to see a rotation away from the highest yield blue-chip dividend stocks into something more cyclical – the resource sector, railroads, agricultural stocks, things that have a lower yield but maybe a better growth opportunity in a more buoyant economic environment. Based on valuation, we have been pulling back in the utilities and pipeline sectors but not to any great degree. We still find the Canadian banks quite attractive. We have been aggressively buying Magna [International], and the life insurance companies, which will benefit from higher interest rates. Having said that, our view is that rates, even though they may tick up a little bit, are not going to go much higher simply because government finance, unemployment, consumers, inflation and the economy in general don't justify it.
Anil Tahiliani, portfolio manager, McLean & Partners Wealth Management, Calgary
Over the past month, even before bond yields started rising, we've been buying cyclical stocks. We've added Finning International, Suncor Energy and Teck Resources. Internationally, we like Mondelez, which was spun off from Kraft. Mondelez [whose brands include Oreos, Chips Ahoy!, Ritz, Cadbury, Dentyne, Trident, Nabisco and many others] is a huge play on global snack foods. We also own Procter & Gamble. The biggest two sectors that have been hit are telecoms and utilities. We haven't had any exposure to them for the last year or two. At some point if we do see a very sharp selloff it could be a buying opportunity, especially in some high-quality real estate investment trusts.
Jim McInnis, vice-president of investments, Cardinal Capital Management, Winnipeg
Rising rates don't change our investment strategy at this time given our current portfolio. We do not own telecoms or pipelines [based on valuation and other concerns]. We like Magna a lot, because of growth in the global auto sector, and because of a consolidation of suppliers and improving margins in Europe. Potash [Corp. of Saskatchewan] is also a top pick because the valuation is attractive, industrial fundamentals are strengthening as supply tightens, and the dividend is rising.
Renato Anzovino, portfolio manager, Heward Investment Management, Montreal
I've been reducing the ones that are more sensitive to interest rates, such as utilities Emera and Algonquin Power. I've been taking profits in quite a few names …. Right now, I'm keeping the cash because I think there's going to be a buying oportunity when this all plays out, but you have to stay away from companies that are only trading on yield and have no growth prospects and no dividend increase power. There could be an opportunity on the Canadian banks. I don't believe that interest rates are going to go up a lot in the short term. One thing people forget is that if rates do go higher that's usually a positive sign for the economy, which is positive for stocks, so people shouldn't panic.