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Sony should benefit from releasing its PlayStation 5 video game console later this year as the gaming trend grows with people staying indoors because of the COVID-19 pandemic and the rise of e-sports. (Photo by CHARLY TRIBALLEAU/AFP via Getty Images)CHARLY TRIBALLEAU/AFP/Getty Images

U.S. billionaire investor Warren Buffett has famously said that investors should “be fearful when others are greedy and greedy when others are fearful.”

For long-term investors, it may be time to start nibbling at beaten-up cyclical, dividend-paying stocks to bet on an economic recovery – even though its timing is uncertain given the scale of the global COVID-19 pandemic and crashing oil prices.

Stock markets have rallied recently amid signs that the outbreak is stabilizing in the hardest-hit countries, but they could retest the March lows. It’s always hard to time the markets because they can often bottom well in advance of clarity.

We asked three dividend fund managers for their top cyclical stock picks.

Stephen Groff, principal and portfolio manager, Cambridge Global Asset Management, a division of CI Investments Inc.

His fund: Cambridge Canadian Dividend Fund

The pick: Gildan Activewear Inc. (GIL-T)

52-week range: $13.64 to $53.33 a share

Forward dividend and yield: 62 cents a share (4.4 per cent)

The Montreal-based apparel giant is having a “brutal year,” but should come out stronger in an economic recovery, Mr. Groff says. Gildan Activewear’s key market is imprintable T-shirts aimed at concert and sporting events – banned during the pandemic – and corporate marketing. “End demand is falling, and the screen printers, the middlemen, are de-stocking,” but Gildan has balance-sheet strength to make it through, he says. After the 2008 recession, the company increased market its share because it’s a low-cost producer thanks to fact it’s vertically integrated, he notes. Gildan’s dividend payout ratio is expected to be higher than 50 per cent this year given the uncertainty, but should improve next year, he says. Its stock trades cheaply based on projected 2021 earnings.

The pick: Keyera Corp. (KEY-T)

52-week range: $10.04 to $36.56 a share

Forward dividend and yield: $1.92 a share (13 per cent)

Shares of this energy infrastructure company have been punished amid negative sentiment in the sector, but it’s still “a good dividend stock for cyclical exposure,” Mr. Groff says. Calgary-based Keyera transports, stores and markets natural gas liquids and iso-octane in North America. It has strong management, a relatively solid balance sheet and its marketing business will be very profitable this year, he adds. There’s counter-party risk from weaker customers among oil and gas producers, but Mr. Groff and his team “believe it’s manageable.” Keyera can consolidate gas plants to reduce costs or slow spending on growth projects to preserve cash, he adds. Based on adjusted funds from operations, the dividend payout ratio, he says, is in the 60-per-cent range for this year and the 70-per-cent range for 2021.

Donny Moss, senior portfolio manager, Industrial Alliance Investment Management Inc.

His funds: IA Clarington Canadian Dividend Fund

The pick: Canadian National Railway Co. (CNR-T)

52-week range: $92.01 to $127.96 a share

Forward dividend and yield: $2.30 a share (2.1 per cent)

Montreal-based Canadian National Railway (CN) is a well-managed railway poised to benefit from an economic recovery, Mr. Moss says. Because it connects the Atlantic Ocean, Pacific Ocean and the Gulf of Mexico, it can move goods from ship to rail efficiently, he adds. CN hauls essential agricultural products so that business is well-insulated, but oil won’t be a growth driver and automobile shipments will be affected this year by plant shutdowns, he adds. Still, CN has a history of coming back strongly after recessions. From April 1, 2007, to April 1 this year, its stock returned 423 per cent, including dividends, versus 53 per cent for the S&P/TSX 60 Index. CN, which has a dividend payout ratio of about 40 per cent, has grown its payout for the past 25 years. Its stock trades under its five-year historical average of 18.5 times earnings.

The pick: Aecon Group Inc. (ARE-T)

52-week range: $10.94 to $21.83 a share

Forward dividend and yield: 64 cents a share (5.1 per cent)

The Toronto-based construction giant, which has an order backlog of $6.8-billion, will get a tailwind from government infrastructure spending over the next decade, Mr. Moss says. Aecon is now bidding on more than $40-billion worth of projects and has a history of winning one-quarter to one-third of bids. It should also benefit from rival SNC-Lavalin Group Inc. retreating from construction projects to focus on engineering, he says. Aecon’s margins have grown over the past two or three years, but it’s difficult to estimate earnings growth this year given work stoppages due to the pandemic. A risk is governments deferring infrastructure investments, but that’s unlikely. Aecon, which has 50-per-cent dividend payout ratio, trades at a very attractive valuation, he says.

Shane Obata, executive director, investments, and portfolio manager, Middlefield Capital Corp.

His fund: Middlefield U.S. Dividend Growers Class

The pick: Sony Corp. (SNE-N)

52-week range: US$42.96 to US$73.86 a share

Forward dividend and yield: US27 cents (0.4 per cent)

Japanese conglomerate Sony is classified as a consumer-discretionary stock so it doesn’t get credit by the market for its technology-oriented businesses, Mr. Obata says. “That is part of the value proposition.” Sony, a maker of video games, should benefit from releasing its PlayStation 5 console this year as the gaming trend grows with people staying indoors because of the pandemic and the rise of e-sports. Sony’s semiconductor unit has strong demand for image sensors used in smartphone cameras, while its music and movie divisions benefit from the streaming trend, he adds. A recession is a risk to the image-sensor business, but it will do well in an economic recovery, he adds. Sony’s stock trades at about 13 times 2021 earning estimates, while its five-year annualized dividend growth rate is 8.6 per cent.

The pick: Nvidia Corp. (NVDA-Q)

52-week range: US$132.60 to US$316.32 a share

Forward dividend and yield: 64 cents (0.3 per cent)

Nvidia, a maker of graphics processing units, is benefiting from a growing demand for better visuals and technology in gaming computers, Mr. Obata says. The Santa Clara, Calif.-based microchip maker gets 50 per cent of revenue from gaming and 30 per cent from its data-centre segment. The company, which has a strong balance sheet, is also applying its technology to self-driving vehicles to process image data quickly. Shares of Nvidia bucked the market plunge in the first three months of 2020 with a positive return. With people at home during the pandemic, there’s a huge demand for computing power and a recession is less of a headwind for gaming now. Nvidia’s stock is not cheap because of its growth prospects, but its dividend has a five-year annualized growth rate of 13.5 per cent, he says.