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Taking big losses is the worst experience for investors but sector rotations – changes in market leadership – present their own type of torture, as dividend and income investors are discovering in 2018.

As the financial crisis ended, the Bank of Canada and U.S. Federal Reserve slashed interest rates, and subsequently bond yields, to extremely low levels to spur consumption and avoid another economic catastrophe.

This policy proved a huge boon for dividend-paying equity sectors like utilities and telecoms. Companies in both industries carry a lot of debt, which could be re-financed at lower rates to boost earnings, and their dividend yields became far more attractive relative to bonds, attracting investor buying.

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Low rates and other factors combined to generate outsized returns for stock prices. The S&P/TSX Utilities Index climbed 146 per cent between April 1, 2009 and the end of 2017 – a healthy average annual return of 10.9 per cent. The telecom subindex rose 241.3 per cent for an average annual return of 15.1 per cent.

Bond yields are now rising and sector performance trends have reversed. Year to date, the utilities sector is the worst performing in the S&P/TSX Composite with a loss of 8.8 per cent. Telecom stocks aren’t doing much better – the index is lower by 5.7 per cent. 2018 is not even half over, and utility and telecom investors are trailing the S&P/TSX Composite’s positive 0.8-per-cent return by a wide margin.

The dilemma for investors in dividend stocks is assessing the sustainability of current bond market trends. Market leadership has flipped, but how long this lasts is an open debate. Performance for dividend stocks should remain inversely correlated with five- and 10-year bond yields – if bond yields continue to rise, returns will remain weak.

We have had, however, numerous false alarms where bond yields and inflation are concerned, most notably the taper tantrum of 2013. A scenario in which global economic growth stalls, and bond yields decline, would see dividend-paying stocks play catch-up with index performance in relatively short order.

There is no debate about the popularity of dividend investing in recent years - it’s been intense, primarily for demographic reasons. Most portfolios with significant overweighting in dividend-paying equities were particularly hard hit in 2018 and that’s what makes sector rotations so difficult. When what has worked stops working, there’s more investors with positions that will fully participate in the downside.

-- Scott Barlow, Globe and Mail market strategist

This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you, you can sign up for Globe Investor and all Globe newsletters here.

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Stocks to ponder

Canadian Tire Corp. (CTC.A-T). This stock appeared on the negative breakouts list earlier this month after the company reported quarterly earnings results that were shy of expectations. In addition, the company announced an acquisition that appears to be rather expensive, priced at a premium valuation. Despite the earnings shortfall and seemingly pricey purchase, the majority of analysts remain positive on the company. The stock has 10 buy recommendations and four hold recommendations. The consensus target price implies the stock may deliver a potential total return (including the 2 per cent dividend yield) of 13 per cent. Jennifer Dowty reports.

Canfor Pulp Products Inc. (CFX-T). This stock caught Norman Rothery’s attention owing to its astonishing advance over the past few weeks. Its stock is up 30 per cent since March, when it returned to the megastar stock list for the second year in a row. The megastars are an elite segment of Report on Business Magazine’s Top 1000 list of the largest companies in Canada, which you can explore here. Just 20 stocks with the best value and momentum characteristics, as measured by a variety of quantitative tests, made it into this year’s megastar roster. The Vancouver-based pulp and paper company is up a whopping 85 per cent since it first became a megastar last year.

McKesson Corp. (MCK-N). McKesson is one of the world’s largest distributors of branded and generic drugs, and medical materials with a market cap of US$31.4-billion, annual revenue of more than US$200-billion and coverage by 81 analysts. Its biggest business is pharmaceutical distribution to independent U.S. drugstores. Outside of United States, it has a retail pharmacy chain in Europe and Canada. But its stock is trading close to the 52-week low. The reason? The fear that Amazon was getting into the prescription drug business. George Athanassakos explains.

The Rundown

How Canada’s big banks are plotting to dominate the ETF world

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Canada’s big banks are muscling into exchange-traded fund offerings and forcing a transformation of an industry dominated by independents, even while putting at risk the high profits and huge asset bases of their traditional mutual-fund businesses. With a fourth Canadian bank recently announcing plans to offer ETFs, and several new product offerings coming to market from others, a shakeup is materializing in the wealth-management industry that has parallels to the banks’ successful move to dominate the mutual-fund industry in the late 1990s. Clare O’Hara reports.

Why Trumponomics will spark the next recession – and soon

Trumponomics will cause the next recession within the next 12 months. I know that sounds soon, but who saw the recession coming in December, 2006, when visions of endless housing-related prosperity danced through everyone’s minds? Who saw the recession coming back in March, 2000, as the Nasdaq was still at nosebleed levels, and talk of a new paradigm in technological advances went viral? The policies pursued by Donald Trump’s administration, from purely a macro standpoint, have on net been detrimental to the economic outlook. David Rosenberg explains his view.

Why price targets so often miss the mark

No, analysts don’t spin a big wheel or throw darts at a board to come up with their price targets, although it might seem like it at times. In reality, price targets are based on a valuation methodology that often involves estimating a company’s earnings and then applying a price-to-earnings multiple to that number to determine where the stock should be trading – at least in theory. John Heinzl examines.

Why it’s even harder to save for retirement for women

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It’s harder to save for retirement if you’re a woman. Women earn less than men on average and more often take time out of the work force to raise children or look after elderly parents. “If you’re not working, then you’re not paying into work pensions, you’re not paying into CPP and you’re not developing the same retirement income base,” said Jane Bolstad, a certified financial planner (CFP) in Calgary. Women also live longer than men on average, which makes it still harder to save enough. Statistics Canada’s most recent numbers suggests a 65-year-old woman has a life expectancy of 22 more years, compared with 19.2 for a male. Note: Those are average numbers, with many people living both shorter and longer. Rob Carrick reports.

Top Links (for subscribers)

For the oil price, ‘lower for longer is dead’

Others (for subscribers)

Tuesday’s analyst upgrades and downgrades

Tuesday’s small-cap stocks to watch

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Tuesday’s Insider Report: Companies insiders are buying and selling

The Globe’s stars and dogs for the week

Others (for everyone)

ETF investors sour on Canadian banks ahead of earnings season

Three fund managers, three strategies in an investment challenge for charity

Buying opportunities arise after emerging-market selloff

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As smart-beta portfolios spread, former fan wonders if they’re actually dumb

The little-known IRS rule that may have some wealthy Canadians eventually owing taxes on their U.S. stocks

Emerging markets shouldn’t induce investor panic

Ask Globe Investor

Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.

What’s up in the days ahead

Dividend stocks have been struggling this year amid rising interest rates and bond yields. But here’s the shocking news: Even though dividend stocks are beckoning income-oriented investors with attractive yields, they still look expensive. David Berman will explain all about.

Click here to see the Globe Investor earnings and economic news calendar.

More Globe Investor coverage

For more Globe Investor stories, follow us on Twitter @globeinvestor

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Compiled by Gillian Livingston

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