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The clouds have been gathering for some time. Now the storm is hitting, and it may be months before the skies clear.

April’s big market sell-off was surprising only in that it was so long coming. Investors seemed determined to ignore all the warning signs, including the global economic impact of the war in Ukraine, the sudden and rapid rise of inflation, the increasingly hawkish pronouncements of our central bankers, continuing supply chain issues and the lingering effects of the pandemic.

Yes, the markets always climb a wall of worry. But this looks more like a skyscraper.

Last week, a friend who spent many years in the investment industry reminded me of something his mentor once told him: “Once a price trend has been established in either direction, prices go much further than you would have thought possible.”

That’s an ominous thought in a declining stock market.

Many of the S&P/TSX subindexes are down this year. The most notable exceptions are the Capped Energy Index (up 46.9 per cent as of Monday’s close) and the Capped Materials Index (up 13.3 per cent).

What’s an income investor to do in this situation? Focus on cash flow, not share prices. Here are some suggestions.

Energy

Many conventional energy companies have raised their dividends in response to the rapid rise in the price of oil. Suncor Energy Inc. SU-T doubled its quarterly payout to 42 cents a share ($1.68 a year) effective with the December payment. It yields 3.6 per cent at the current price. Freehold Royalties Ltd. FRU-T has boosted its monthly dividend three times since last July. It currently pays 8 cents a share (96 cents annually) to yield 6.6 per cent.

These are very attractive yields. The problem is they aren’t dependable. Many conventional oil companies, including the two just mentioned, slashed their dividends when oil prices plunged a couple of years ago. Freehold paid only 1.5 cents a month for most of 2020. Suncor cut its dividend by 55 per cent when the pandemic drove down oil prices. If you’re relying on cash flow from your investments to fund your lifestyle, these are nervous choices.

Utilities

The Capped Utilities Index is up only 1.3 per cent so far this year, but it represents safer ground for income investors. Utility stocks generally offer a decent yield, with little chance of a dividend cut. The trade-off is that capital gains potential is limited, but that’s a small price to pay for income security.

We have several utilities on the Income Investor recommended list, including Fortis Inc. FTS-T, which is currently yielding 3.5 per cent; Canadian Utilities Ltd. CU-T, which pays 4.7 per cent; Capital Power Corp. CPX-T, with a yield of 5.1 per cent; and Emera Inc. EMA-T, paying 4.3 per cent. These should be your first choice for a conservative, low-risk portfolio.

Communications

This sector has performed well so far in 2022, up 5.6 per cent for the year. As with utilities, these stocks offered decent yields and the likelihood of any dividend cuts is remote, even if we slide into a recession.

The flagship recommendation here is BCE Inc. BCE-T, which recently raised its quarterly dividend by about 5 per cent to 92 cents ($3.68 a year). The current yield is 5.4 per cent. I also like Telus Corp. T-T, which currently yields 4.1 per cent.

Pipelines

There is no specific pipelines subindex, but if there were it would be performing well. Enbridge Inc. ENB-T is up 13.2 per cent so far this year and is paying a quarterly dividend of 86 cents a share ($3.44 a year) to yield 6.2 per cent. TC Energy Corp. TRP-T has gained 16.1 per cent year to date and pays a quarterly dividend of 90 cents ($3.60 a year) for a yield of 5.3 per cent. Pembina Pipeline Corp. PPL-T has seen its stock rise 26.1 per cent this year. It pays a monthly dividend of 21 cents ($2.52 a year), to yield 5.2 per cent.

Banks

The Capped Financials Index is off 5.7 per cent for the year, but some individual stocks in the sector are doing better. My recommendation of Bank of Montreal BMO-T is down 0.6 per cent so far in 2022 and recently raised its dividend by 25 per cent to $1.33 a quarter ($5.32 a year), to yield 3.9 per cent.

Rising interest rates are favourable to banks because they increase net interest margins, the difference between what banks pay to depositors and what they charge borrowers. It’s unlikely we will see any dividend cuts in this sector; in fact, there may be more increases.

To sum up, the coming months are likely to see significant market turbulence. Stock prices may fall further than anyone expects. Focus on secure dividend-paying stocks and avoid those with a record of cutting their payments in bad times, like the conventional energy sector.

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 www.buildingwealth.ca/subscribe

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