The pandemic has weighed heavily on dividend-paying stocks, sending many yields to remarkable heights. As a result, investors can buy a selection of blue-chip Canadian stocks yielding 5 per cent or more right now, a tempting payout next to low-yielding government bonds.
The price of Royal Bank of Canada shares is down more than 20 per cent from its 52-week high, sending the dividend yield – which compares the bank’s annualized cash distribution to its current share price – to 5.2 per cent. Before the novel coronavirus pandemic struck North American financial markets, RBC’s yield was about 4 per cent. BCE Inc. is down 16 per cent from its recent high, and has a yield of 6 per cent. And Enbridge Inc. is down 22 per cent, with a yield of 7.3 per cent.
Of course, alluring dividend yields also come with risks.
“If this is not the most uncertain time in the past 50 years, it’s definitely up there,” said Ryan Bushell, president of Newhaven Asset Management Inc. “When we’re looking at the employment picture and the hampering of all business activity, I think it calls pretty much all business models into question.”
But amid the recent rebound in stocks, which has largely favoured hot tech names, are opportunities.
"There are a lot of high-quality Canadian companies with very attractive dividends that have been overlooked,” said Stuart Isherwood, a portfolio manager at Georgian Capital Partners.
The dividend-payers look particularly striking next to low yields on government bonds. The yield on the 10-year government of Canada bond, for example, has retreated below 0.54 per cent from about 1.6 per cent at the start of the year.
The catch: Wide spreads can suggest the market is worried about the financial prospects of these companies, which is why stock prices have been dropping.
“While the dividend yields may look pretty good at the moment versus bond yields, many of the stocks in the blue-chip category have more question marks around their earnings outlooks and future growth than in recent history,” Don Newman, portfolio manager of the Fidelity Dividend Plus fund, said in an e-mail.
The banks are a key example here as their fiscal second-quarter reporting season kicks off next week. Analysts are expecting sharply lower profits and a spike in the number of bad loans. As well, dividend hikes are off the table.
Telecom companies have been dealing with struggling business customers. REITs face the prospect of unpaid rents from some tenants. Pipelines are reflecting concerns about the impact of low oil prices. Even utilities face the prospect of reduced power consumption from the decline of economic activity.
Even so, the current bout of economic uncertainty won’t last forever, and hefty dividends may already be compensating for risks.
Analysts expect that bank dividends are safe, for now at least. Among REITs, Mr. Bushell sees the potential in the hard assets of RioCan. Mr. Isherwood likes Choice Properties, which gets about half its revenue from Loblaw stores. He added Bank of Montreal to the firm’s core Toronto-Dominion Bank holdings. He has also been buying BCE shares.
“I think it is really hard to make an argument that the dividend would be threatened,” Mr. Isherwood said.
Full disclosure: The author owns shares in Hydro One, Enbridge and an exchange traded fund that tracks all Big Six bank stocks.