The Fed's going to taper. The Fed's not going to taper – at least not immediately.
Last week's flip-flop by the U.S. Federal Reserve may have brought some short-term relief for dividend stocks, which have struggled amid rising bond yields. But longer-term, rising interest rates remain a threat.
What's a dividend investor to do?
To help us navigate the uncertain waters ahead, Yield Hog spoke to Anil Tahiliani, portfolio manager with McLean & Partners Wealth Management. The Calgary-based firm, which manages money for high net worth individuals, emphasizes mid-cap and large-cap stocks with a history of rising dividends.
"Given the Fed's decision not to taper, investors will be focused on every piece of U.S. economic data until the next Fed meeting [in late October]," Mr. Tahiliani said. "Dividend income investors should have a well-diversified portfolio with a bias towards pro-growth and cyclical stocks."
With the economy expected to pick up, he's especially keen on energy- and materials-related stocks that have lagged the market but which have strong balance sheets and positive cash flow. For income, he looks for higher-yield plays that also have growth potential.
Here are six stocks he likes in the current environment:
- Tues. close: $22.80 Yield: 2.7 per cent
- Three-yr. div. growth: 8.3 per cent
Finning is the world's biggest Caterpillar equipment dealer, serving industries such as energy, mining and construction in Canada, South America and Britain. But the stock's been clobbered by slumping sales of mining equipment and new CEO Scott Thomson will need some time to turn things around, Mr. Tahiliani said. In the meantime, he likes the company's strong balance sheet, the cheap multiple of 10.3 times estimated 2014 earnings and the fact that a hefty chunk of revenue is recurring from parts and service.
- Close: $42.63 Yield: 6.2 per cent
- Three-yr. div. growth: 10 per cent
Because Baytex ships much of its production by rail, it's able to get the oil to markets where it can command a higher price, Mr. Tahiliani said. The 6.2-per-cent yield may seem high, but the dividend is safe thanks to Baytex's strong balance sheet, he said What's more, relative to oil prices, the stock is trading at a discount to its historical valuation levels.
- Close: $53.48 (U.S.) Yield: 1.3 per cent
- Three-yr. div. growth: 0 per cent
Joy Global, which makes heavy equipment for the mining industry, has seen its share price nearly cut in half from its 2011 high. But the stock may have hit bottom, Mr. Tahiliani said. "Commodities are still depressed but the time to buy cyclical stocks is when there's no visibility of a turnaround," he said.
"Typically these stocks will start rising before …you see the big mining guys start putting orders in for equipment. Investors will start anticipating a turn."
- Close: $28.20 Yield: 3.2 per cent
- Three-yr. div. growth: 65 per cent
Copper and coal miner Teck is another victim of the commodity slump, but it's sitting on about $2.8-billion of cash and has a strong management team to steer it through the downturn, Mr. Tahiliani said. "I think it's the best diversified miner in Canada, basically," he said. What's more, he considers the dividend safe and said the company has been buying back its own shares.
- Close: $39.44 Yield: 4.5 per cent
- Three-yr. div. growth: 14.1 per cent
Brookfield Infrastructure Partners owns a global portfolio of utilities, toll roads, railways, ports and other long-life assets that produce steady cash flows. "What I like about their business is 85 per cent of the cash flow is [based on] long-term contracts," Mr. Tahiliani said. "They're committed to increasing their dividend. It's almost like buying a bond, but with growth." Because the company is structured as a limited partnership, however, investors need to be aware of the tax consequences.
- Close: $27.43 Yield: 4.7 per cent
- Three-yr. div. growth: negative 11.4 per cent
Davis + Henderson, a former income trust that converted to a corporation (and cut its dividend) in 2011, has transformed itself into a diversified financial services technology company from its roots as a cheque printer.
Its recent $1.2-billion (U.S.) acquisition of Harland Financial Solutions, a U.S.-based provider of banking technology, tripled D+H's U.S. customer base. "They've really turned from a mature company into a growth vehicle," Mr. Tahiliani said. The dividend is growing again, but only modestly, as the company focuses on acquisitions.