John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
When a store has a sale, customers come rushing.
But when a stock goes on sale, many investors do the opposite: Worried the price will continue to drop, they stay away. Worse, investors who own the shares may sell out of fear, locking in the lower price and missing out on a potential recovery.
Let's be clear: If a company has taken a serious turn for the worse and it's expected to be permanent, selling may be the best option. However, if the long-term outlook for the business remains positive, a setback in the price can present a buying opportunity.
When you're investing in dividend stocks, buying after a dip has two big advantages: It gives you a higher initial yield, and – because the stock price is already reflecting whatever worries may be out there – it may offer protection from further downside.
Today we'll look at two higher-yielding dividend stocks that have recently tumbled from their highs. I own both of these companies personally and, while I won't try to predict what their share prices will do in the short run, I believe both will deliver capital gains and rising dividends over the long run.
Algonquin Power & Utilities Corp. (AQN-TSX)
Price: $13.13
Annual dividend: 46.6 cents (U.S.)
Yield: 4.4 per cent *
Hit by concerns about rising bond yields, shares of Algonquin Power & Utilities have tumbled more than 8 per cent from their intraday record high of $14.35 on June 6. But Algonquin's business is as healthy as ever: Raymond James, which named Algonquin one of its "Best Picks" for 2017, said in a recent update that the company is its "go-to option in the sector" and that its "superior growth profile provides an important offset" to the risk of higher rates.
"With the stock coming under pressure of late due to rising interest rates, we believe the … downward move from the [year-to-date] high is largely overdone," Raymond James analyst David Quezada said in a note. Algonquin now trades at a price-to-earnings multiple of about 18.5 times 2017 estimates, which is line with the North American peer-group average P/E, even as Algonquin's earnings per share are expected to grow at a compound annual rate of 17 per cent through 2018, compared with 11 per cent for peers.
Algonquin's asset mix – roughly 70 per cent of earnings are from regulated utilities and 30 per cent from contracted renewable power – offers diversification benefits, and the company's $6.3-billion capital-deployment plan over the next five years should easily allow it to meet its 10-per-cent annual dividend-growth target, Mr. Quezada said. Keep in mind that Algonquin declares its dividend in U.S. dollars, which means the recent rise in the loonie has pinched the income of investors who convert their Algonquin dividends to Canadian dollars.
A&W Revenue Royalties Income Fund (AW.UN-TSX)
Price: $32.68 (Canadian)
Annual dividend: $1.60
Yield: 4.9 per cent
A&W Revenue Royalties Income Fund delivered a sizzling total return of nearly 20 per cent annualized in the five years through 2016. But this year has proved more challenging: Hurt by slowing same-store sales – particularly in Alberta and Saskatchewan, which account for about one-quarter of its locations – A&W's units have tumbled about 22 per cent from their February intraday high of $42.16.
Rising interest rates have also posed a headwind for dividend stocks in general and A&W in particular. For long-term investors, however, now may be a good time to take a nibble: On Tuesday, the purveyor of Teen Burgers, onion rings and A&W root beer reported that same-store sales rebounded by 0.7 per cent in the second quarter after slipping 0.3 per cent in the first quarter.
For royalty stocks such as A&W – which own the chain's trademarks and receive a royalty based on sales of restaurants in the "royalty pool" – same-store sales are the biggest driver of distribution increases. Elizabeth Johnston, who follows A&W for Laurentian Bank Securities, said A&W's same-store sales came in weaker than her estimate of 2-per-cent growth in the second quarter. But in a note before the company's conference call on Tuesday, she said she still expects the fund to hike its monthly distribution in 2017 and 2018 (after two increases in 2015 and 2016). Expansion is another potential driver of distribution growth: A&W, whose nearly 900 restaurants are skewed toward Western Canada, is aiming to add about 200 franchises by the end of 2020, focusing on Ontario, Quebec and Atlantic Canada.
Closing thoughts
Remember to do your own research before investing in any security and be sure maintain a diversified portfolio to control your risk from any one stock. For more investing ideas, see my Strategy Lab model dividend portfolio at tgam.ca/divportfolio.
* Yield calculated by converting U.S. dollar dividend to Canadian dollars based on an exchange rate of $1 (Canadian) = 80 cents (U.S.).