Would you recommend buying dividend stocks now, or do you think the market could fall further if the coronavirus spreads and the economy takes a major hit?
I believe that what we’ve witnessed over the past few weeks is classic panic selling. Many investors are so afraid of what the future might hold that they want out at any price, and a dearth of buyers has only exacerbated the declines. Making the situation worse, investors who bought stocks with borrowed money have faced margin calls as prices slid, forcing them to either deposit more cash into their accounts or liquidate their positions.
Let’s be clear. The coronavirus is a serious disease and the aggressive measures governments are taking to control it are going to put a dent in economic growth – possibly a large dent. But in many cases, because of the pervasive fear that has set in, stock prices have fallen below what analysts consider reasonable valuations of the businesses themselves.
“I think we’re going to look back on this, in the relatively short term, as a remarkable opportunity to buy equities, especially those that are inherently lower risk and provide income,” Darryl McCoubrey, an analyst with Veritas Investment Research, said in an interview.
For example, shares of Capital Power Corp. (CPX) plunged about 34 per cent through the first four days of the week. Yet, the risk from coronavirus to Capital Power’s business – generating electricity from coal, natural gas, wind, solar and other sources – is “remarkably low,” Mr. McCoubrey said. On Friday, Capital Power’s shares rose 8 per cent but were still yielding an attractive 7.3 per cent.
Other companies that Mr. McCoubrey covers have also been unduly punished by COVID-19 fears, including utilities Fortis Inc. (FTS) and Emera Inc. (EMA) and pipelines TC Energy Corp. (TRP) and Enbridge Inc. (ENB).
With the market getting crushed, yields on these and other stocks have jumped, but the dividends are still highly secure, Mr. McCoubrey said. “These stocks are unlikely to see the kind of fundamental deterioration in profit that impacts any of their dividend payouts in the near term,” he said.
Mr. McCoubrey said valuations are the most attractive they’ve been in “many, many, many years,” but he added that they could get even more attractive in coming weeks if coronavirus fears cause more indiscriminate selling.
Other analysts are also seeing compelling value. In a Friday note, Raymond James analyst David Quezada upgraded Fortis to “outperform” in light of a roughly 20-per-cent decline in the utility operator’s share price from its recent highs. Calling Fortis “the premier defensive name in our coverage universe,” he cited the company’s diversified assets, highly regulated earnings and $18.8-billion capital plan that faces “minimal risk.”
It isn’t just utilities, power producers and pipelines that look appealing. Real estate investment trusts – another sector favoured by income seekers – have also been hammered to an unreasonable degree in many cases, analysts say.
“The baby is being thrown out with the bathwater regarding the REITs,” Johann Rodrigues of Raymond James said in an e-mail. REITs had been outperforming the broader market so a sell-off was not a complete surprise, but he doesn’t expect the coronavirus will have much impact on REITs’ net operating income and cash flows.
“Leases will be abided by, rent will be paid and cheap mortgage debt is readily available for those that have maturities coming up," Mr. Rodrigues said. He also doesn’t see any risk of REITs cutting their distributions in the near term, although REITs with heavy exposure to Alberta could be facing greater risk if oil prices remain low for an extended period.
If the coronavirus triggers a global recession, “then all bets are off in terms of visibility. But for the next six to 12 months at least, there’s no threat of a [distribution] cut to the 25 names I cover,” he said.
“This is an unprecedented situation and it’s hard to predict what fear and panic might do to investor sentiment,” Mr. Rodrigues said. Investors looking for downside protection might consider apartment REITs such as InterRent REIT (IIP.UN), Canadian Apartment Properties REIT (CAR.UN), Minto Apartment REIT (MI.UN) and Killam Apartment REIT (KMP.UN), he said.
Rental supply is still “far from adequate” in Ontario, Quebec, British Columbia and, to a lesser extent, Atlantic Canada, he said. As the coronavirus plays out, “people still need places to live, especially since they’ll likely be forced to spend more time inside. The one possible impact could be a rise in bad debt should prolonged leave from work lead to lost income or even jobs for some. But the government has money set aside to help workers in those situations."
Whether you’re looking at apartment REITs, utilities or other sectors, as always stay diversified and focus on the long term. This turmoil will pass, and it may well turn out to have been a terrific time to buy income-producing stocks.
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