If the Canadian stock market isn’t doing much for you because of its lacklustre performance and heavy exposure to commodity-sensitive natural resources, then consider its ability to generate income. Lots of income.
The S&P/TSX Composite Index is packed with stocks that have strikingly high dividend yields right now.
Some examples: Both Capital Power Corp. and Power Corp. of Canada have yields of 6.7 per cent. BCE Inc. and Manulife Financial Corp. have yields of 6 per cent each. Enbridge Inc.'s dividend yield is 8.6 per cent and RioCan Real Estate Investment Trust has a yield of 9.8 per cent.
Not only are these dividend yields remarkable on their own, they stand out in today’s environment of ultra-low yields on guaranteed investment certificates (GICs) and government bonds.
Some market watchers believe that there is an opportunity here.
“High-yielding sectors such as banks, insurers, communications, and utilities appear to be pricing in the worst for the impact of the virus, but little of the appeal of their yields in an extremely low interest rate environment,” Ian de Verteuil, a strategist at CIBC World Markets, said in a note.
True enough, GICs and government bonds are also ultra-safe, while high dividend yields may be at risk of stagnation, cuts and outright suspensions due to the uncertain economy and lingering pandemic.
Indeed, dividend yields are only elevated because stock prices are down (a dividend yield compares a stock’s annual payout to its price). The S&P/TSX Composite High Dividend Index, composed of 75 stocks selected because of their impressive dividend income, has fallen 17.8 per cent over the past year (or 12.9 per cent including dividends).
The broader S&P/TSX Composite Index has fallen just 2 per cent over the same period.
But Mr. de Verteuil pointed out that even this broader index has a dividend yield that is five to six-times that of 10-year Government of Canada bonds – by far the widest spread for data going back more than three decades. The 10-year bond has a yield of just 0.6 per cent right now, after starting the year at about 1.7 per cent, while the index is yielding more than 3.64 per cent, according to Refinitiv Eikon.
Dividend stocks are towering over GICs, too. Consider that locking $5,500 into a GIC at just 1 per cent will generate just $55 per year. But buying 100 shares in TC Energy Corp., a pipeline operator that pays a dividend of 81 cents per share (and yielding 5.9 per cent), for about $5,500 will generate $324 per year. And TC Energy has been raising its dividend every year.
As for the safety of stocks, dividend cuts this year have raised some alarms. There have been 34 cuts, which already makes 2020 the worst year going back 15 years (and including the financial crisis), noted Mr. de Verteuil. The value of those cuts is more than $5-billion, which also exceeds the financial crisis.
However, the severity of the dividends cuts has been relatively tame so far. From peak to trough, total payouts by companies in the S&P/TSX Composite Index have fallen just 9 per cent, according to Mr. de Verteuil. That compares with payout declines of 23 per cent during the financial crisis of 2008 and 2009.
Using 15 years of dividend data, he found that energy, industrials and health care companies are the riskiest in terms of dividend stability. About 10 per cent of companies in these three sectors have cut their dividends in any given year. But for financials, utilities and real estate companies – happy hunting grounds for today’s dividend investors – the probability of a dividend cut (again, using historical data) is 5 per cent or less.
“We would never say that dividend cuts are done, but we do note that 70 per cent of the dividends on the S&P/TSX Composite come from relatively ‘safer’ sectors, specifically banks, insurers, pipelines, communications and utilities stocks,” Mr. de Verteuil said in his note.
These are challenging times for dividend stocks. That’s what makes them appealing.
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