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Are we headed toward a recession? Economists are divided, but our readers think we are.

An online poll of my Income Investor and Internet Wealth Builder newsletter readers, conducted last week, found that 57 per cent of respondents said yes, a recession is on the horizon. A total of 16 per cent said we’re already there.

At the other extreme, 21 per cent do not see a recession as likely, while 6 per cent don’t know.

My view is that a recession before year-end is more likely than not. World economic growth is slowing. But don’t take my word for it. Jamie Dimon, the highly respected chief executive of JPMorgan Chase, warned last week that an economic hurricane is on the horizon.

“That hurricane is right out there down the road coming our way,” he said at an investor conference. “We don’t know if it’s a minor one or Superstorm Sandy. You better brace yourself.”

Central bank actions to slow economic growth by raising interest rates and withdrawing quantitative easing are a large part of his concern. Rising inflation, the potential escalation of the war in Ukraine and the possibility of a COVID-19 resurgence add to the worries.

Both the United Nations and the International Monetary Fund (IMF) have recently downgraded their forecasts for world economic growth in 2022. Neither is forecasting a recession, but the IMF predicts 3.6 per cent growth, well down from 6.1 per cent in 2021 and subject to further revisions as the year progresses.

What do you do in this situation, other than selling everything and sitting in cash? Pursue dividend paying stocks, especially those with a history of regular increases.

Dividends are reflections of a company’s success. Organizations that raise their payout on a regular basis are telling us they are doing well now and are confident about their future. Sustainable dividends also help to support a stock in a falling market.

It’s very rare for companies to cut dividends, except for those in high-volatility sectors such as mining and energy.

Here are my choices for the best sectors to find quality dividend stocks right now.

Banks

The banking sector reported second quarter 2022 earnings in May and most raised their dividends for the second time in the past six months, after they had been frozen for almost two years by the Office of the Superintendent of Financial Institutions. The combination of these increases plus share price pullbacks has pushed up yields to attractive levels. Royal Bank of Canada (RY-T) now yields 3.9 per cent, Toronto-Dominion Bank (TD-T) is at 3.7 per cent and Bank of Montreal (BMO-T) is at 4 per cent. The top yielders among the Big Five are Bank of Nova Scotia (BNS-T) at 4.8 per cent and Canadian Imperial Bank of Commerce (CM-T) at 4.7 per cent.

Bank stocks have been in decline this year owing to fears that a slowing economy will hurt business. Offsetting that is the steady rise in interest rates, which allows banks to charge more for loans. That increases the net interest margin (NIM), which is the difference between what a bank charges borrowers and the amount it pays to depositors. The higher the NIM, the more profitable the lending business. At this stage, analysts are divided on whether the current environment will prove to be a net benefit to bank earnings. If it is, expect more dividend increases in the coming months.

Utilities

Electricity and gas suppliers have always been a dependable source of dividend income. Most increase their payouts annually, albeit by a modest amount. Canadian Utilities Ltd. (CU-T) has raised its dividend for 50 consecutive years. It currently yields 4.5 per cent.

Other utilities to consider include Capital Power Corp. (CPX-T) with a 4.8-per-cent yield, Emera Inc. (EMA-T) at 4.2 per cent, Fortis Inc. (FTS-T) at 3.4 per cent and Hydro One Ltd. (H-T) at 3.3 per cent.

Telecoms

They used to be called “widow and orphan” stocks for their cash flow and dependability. They still offer good yields, with limited downside risk. BCE Inc. (BCE-T) offers the best payout, with a quarterly dividend of 92 cents a share (5.4-per-cent yield). Telus Corp. (T-T) yields 4.2 per cent while Rogers Communications Inc. (RCI.B-T) is at 3.1 per cent.

Pipelines

Perhaps pipeline companies are doomed as the world gradually weans itself off fossil fuels. But perhaps not. Pipelines can transport other liquids or gases if need be. Think water to California, biofuels, even, believe it or not, beer. But all that is in the future. Right now, pipeline companies are running up big profits doing what they have always done – moving oil and gas from wellheads to refineries and processed hydrocarbons to markets.

The best payout from a Canadian pipeline company is the quarterly 86-cent dividend from Enbridge Inc. (ENB-T), which works out to a yield of 5.8 per cent at the current price. TC Energy Corp. (TRP-T) pays 90 cents a quarter, to yield 4.9 per cent, while Pembina Pipeline Corp. (PPL-T) pays a monthly 21 cent dividend, which translates into a yield of 4.8 per cent.

REITs

Real estate investment trusts are a useful source of cash flow, but they aren’t as dependable as some of the other sectors I’ve mentioned. Some cut their distributions when the pandemic hit, such as Morguard REIT (MRT.UN-T) and H&R REIT (HR.UN-T). Others have kept their payments unchanged for years, such as Northwest Healthcare Properties REIT (NWH.UN-T), True North Commercial REIT (TNT.UN-T) and Dream Industrial REIT (DIR.UN-T).

Then there are a handful with a history of modest but steady increases. They include CT REIT (CRT.UN-T), Granite REIT (GRT.UN-T) and Canadian Apartment Properties REIT (CAR.UN-T).

This is a sector that requires careful research and selection. There are some good choices, but it’s easy to get burned.

Outliers

Occasionally you’ll find a dividend stock that doesn’t fit the conventional parameters. An example is Russel Metals Inc. (RUS-T). It’s a metals distribution company, which is a highly cyclical business. Over the past five years, the shares have traded as low as $13 and as high as $35. But the quarterly dividend never changes. The company pays investors 38 cents a share every three months, no matter how the economy is performing or what’s happening on the bottom line. At the current price, that’s a yield of 4.8 per cent and it’s as dependable a return as you’ll find.

I’ve just scratched the surface here. There are a lot more quality dividend stocks available. Think of them as anchors for your portfolio.

Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to buildingwealth.ca/subscribe

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