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If all the portents are right, 2024 should be a good year for dividend stocks. It’s about time. These normally dependable low-risk securities were savaged during the sharp run-up in interest rates as the central banks fired all their guns at the inflationary genie.

Solid utilities like Fortis Inc. (FTS-T) saw the market price of its shares fall 19 per cent between May 2022 and September 2023. Enbridge Inc. (ENB-T) was down 23.7 per cent. BCE Inc. (BCE-T) lost almost 25 per cent. Talk about blood in the streets!

This was not supposed to happen to conservative portfolios, but it did. Investors were shell-shocked, and with good reason.

The good news is that the share prices of these securities should recover as interest rates stabilize and eventually reverse course. The U.S. Federal Reserve Board signalled in December that it anticipates lowering interest rates three times this year. There’s no guarantee, of course – inflation may decide to hang around longer than expected. But all signs indicate the next moves from the central banks will be down, not up.

So, how can you take advantage of this situation? One possibility is to emulate my model High Yield Portfolio, which is tracked in my Income Investor newsletter. Our last review was in September, at a time when interest-sensitive securities were bottoming out. At that point, the portfolio was showing an average annual compound total rate of return of 7.8 per cent over 11-1/2 years. Annual cash flow at that time was 5.7 per cent, which forms part of the overall return. Some of the stocks we hold are Enbridge, Pembina Pipeline Corp. (PPL-T), Sun Life Financial Inc. (SLF-T), Capital Power Corp. (CPX-T), BCE, and Canadian Imperial Bank of Commerce (CM-T).

If you’re confident in your stock picking abilities, you could build your own dividend portfolio. Make sure it’s properly diversified across all the key sectors: financials, utilities, telecoms, REITs, and pipelines. There are also good dividend payers in areas you wouldn’t normally consider. Examples are Russel Metals Inc. (RUS-T), with a dividend yield of 3.6 per cent, and Aecon Group Inc. (ARE-T), which yields 5.4 per cent.

Another possibility is to invest in dividend ETFs. There are dozens of them in Canada. The iShares S&P/TSX Dividend Aristocrats Index (CDZ-T) is one that should be considered. It was recommended in Income Investor in 2011.

This ETF invests in a portfolio of large cap stocks that have increased dividends annually for at least five consecutive years. No position is larger than 3.25 per cent, so it’s a well-balanced portfolio. Holdings include Aecon Group, Chartwell Retirement Residences (CSH.UN-T), Great West Life Inc. (GWO-T), CIBC, and Power Corp. (POW-T). The fund gained 9.26 per cent in 2023 and has a ten-year average annual compound rate of return of 6.41 per cent. Monthly distributions are currently 10.6 cents per unit. Closing price on Friday was $31.25.

Another Canadian ETF to look at is the iShares Core MSCI Canadian Quality Dividend Index ETF (XDIV-T). It invests in a portfolio of Canadian high-dividend stocks with steady or increasing yields. It gained 16.4 per cent in 2023, more than double the return of the TSX Composite.

This is a more concentrated portfolio, with only 17 holdings. That means bigger bets on each stock, which translates to greater return potential but higher risk. Top holdings are Royal Bank of Canada (RY-T, 9.81 per cent of the portfolio), Manulife Financial Corp. (MFC-T, 9.65 per cent), Pembina Pipeline (8.97 per cent), Toronto-Dominion Bank (TD-T, 8.93 per cent), and Fortis Inc. (8.71 per cent). Distributions are paid monthly and are currently running at 10.3 cents per unit. The units closed Friday at $25.64.

If you’re interested in a U.S.-based dividend ETF, consider the iShares Core Dividend Growth ETF (DGRO-N), which is currently trading at US$53.94. It invests in a diversified, equal weight portfolio of U.S. companies with a history of dividend growth. The names are familiar to all investors and include JPMorgan Chase & Co. (JPM-N), Microsoft Corp. (MSFT-Q), Johnson & Johnson (JNJ-N), Exxon Mobil Corp. (XOM-N), Chevron Corp. (CVX-N), AbbVie Inc. (ABBV-N), and Broadcom Ltd. (AVGO-Q). The fund gained 10.43 per cent in 2023 and has a five-year average annual compound rate of return of 12.88 per cent.

I like dividend stocks in all circumstances, but I think they look especially attractive this year, given the current situation. If you are underweight in these securities, now is the time to stock up.

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 19/04/24 2:06pm EDT.

SymbolName% changeLast
Aecon Group Inc
Canadian Imperial Bank of Commerce
Capital Power Corp
Chartwell Retirement Residences
Enbridge Inc
Fortis Inc
Great-West Lifeco Inc
Ishares S&P TSX CDN Dividend ETF
Ishares Core MSCI CAD Qlty Div ETF
Manulife Fin
Pembina Pipeline Corp
Power Corp of Canada Sv
Royal Bank of Canada
Russel Metals
Sun Life Financial Inc
Toronto-Dominion Bank

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