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It looks like 2005 could shape up as the year of the dividend.

Major investment dealers say in forecast after forecast that investors should look to dividend stocks this year as a way of playing defence in what is widely expected to be a soft year for stocks. Strategists like the classic safe sectors such as utilities, telecom, financials and consumer staples, but maybe you'd like to take a somewhat more aggressive stance.

One way to do this is to put a Canadian spin on the successful Dogs of the Dow strategy, where you buy the 10 highest yielding stocks on the Dow Jones industrial average. The Dow dogs have been, well, dogs lately because of troubles at blue-chip giants such as Merck and General Motors, but they have historically done well against the Dow itself and the S&P 500 index.

There are a couple of ways to build a portfolio comprising the dogs of the TSX. You could just buy the 10 highest yielding stocks in the S&P/TSX 60 index of behemoth blue chips, but then banks and pipeline stocks would account for seven of your holdings. Not much diversification there.

A more speculative but potentially more rewarding approach would be to look at the highest yielding stocks in each of the 10 stock groups of the S&P/TSX composite index, plus three subgroups. Owning these stocks would offer solid dividend yields for the most part, plus the potential for capital gains. Also, there's the diversification benefit of being exposed to a wide variety of economic sectors.

There are really two classes of dog stocks on the Toronto Stock Exchange, one being well performing stocks that happen to offer the best dividend yields in their sector. The other class is the true dogs, stocks that have been driven down in price on concerns about one thing or another. Share prices and dividend yields move in opposite directions, so a falling price means a higher yield.

The Dogs of the Dow strategy works because the stocks listed in the Dow Jones industrial average are proven blue chips. Looking for high-yielding dogs on the TSX requires more care because some of these companies are speculative investments. Let's take a sector-by-sector look at your options.

Consumer discretionary: Torstar Corp.

Torstar is a classic dog. Thanks to a big decline in its share price last year, this publisher of newspapers and romance novels offers the highest yield in its sector by a good margin over Hudson's Bay Co.

Consumer staples: Rothmans Inc.

Sure, cigarettes are nasty things. But just as they produce all those carcinogens and litigation risk, they also generate the steady profits that allow Rothmans to finance its bounteous dividend. Molson offers the next highest yield at just 1.7 per cent.

Energy: PetroKazakhstan Inc.

The former Hurricane Hydrocarbons is the best of a mediocre lot of dividend-payers in the energy sector -- that's one caveat with this stock. The other is that its price soared in the past 12 months. If oil prices were to come down sharply, this stock could give back some of its gains.

Financials: Laurentian Bank of Canada.

No, this wouldn't be my choice either if I were looking for a bank stock to buy. But from a yield point of view, Laurentian offers a 1.2-percentage-point premium over the next highest bank, Canadian Imperial Bank of Commerce. Laurentian's share price has been on a three-year downward trend, but it's a favourite of value-investing specialist Irwin Michael, who has highlighted it on his website, Value Investigator ( http://www.valueinvestigator.com).

Real estate: Brookfield Properties.

There's not much selection in the real estate sub-group -- just Brookfield and MI Developments Inc., neither of which offer a decent yield. Here's a thought -- why not substitute the highest-yielding real estate investment trust in the S&P/TSX capped income trust index. That would be InnVest REIT, yielding 9.7 per cent.

Health care: MDS Inc.

The health care group is a dead loss for dividends. MDS is the only dividend-payer and its yield is microscopic. This might be acceptable if the stock had any life at all, but the reality is that MDS has been in a tailspin lately.

Industrials: Russel Metals.

Russel is a distributor of metal tubes, valves and fittings that is starting to be mentioned more frequently by analysts as a result of its high dividend yield and excellent share price appreciation in 2004. You can get a 3.8-per-cent yield from Bombardier, which offers a higher level of risk but also turnaround potential.

Information Technology: Gennum Corp.

Gennum is a volatile, thinly traded stock that pays only a small dividend, but it's the best of a poor lot in terms of tech dividend stocks. Dog lovers may want to take a pass on this sector.

Materials: Norbord Inc.

Previously known as Nexfor, this forest products producer is in good enough shape to have paid a $1-per-share special dividend to shareholders last fall. Steel maker Dofasco Inc. offers the next highest yield at 3 per cent, but it's tough to call this stock a dog after a 22-per-cent share-price gain in the past year.

Gold: Barrick Gold Corp.

Goldcorp Inc. actually offers the highest dividend yield among the golds, but the company's future is unclear because it's the target of a hostile takeover, even while planning its own takeover of another gold producer. Barrick's a respected name, but the share price hasn't done a heck of a lot in recent years.

Metals and mining: Noranda Inc.

An iffy purchase, given that Noranda has been in talks with potential acquirer China Minmetals Corp. Next best is copper producer Aur Resources, with a yield of 1.6 per cent and nickel miner Falconbridge Ltd. at 1.3 per cent.

Telecom services: Manitoba Telecom Services.

There are four dividend stalwarts in this stock group, but MTS has by far the highest yield of the bunch. In fact, it's one of only a very few TSX-listed stocks to have a yield above 5 per cent right now. Next best among high-yielding telecom stocks is BCE, which just raised its dividend for the first time in a decade.

Utilities: TransAlta Corp.

A perennial question among dividend aficionados is whether TransAlta's dividend is sustainable. There are sharp minds that have decided the answer is no, but for now the company continues to churn out $1 per share annually in dividends. Next best is Emera Inc. with a yield of 4.5 per cent.

You can take your own look at the Dogs of the TSX on Globeinvestor.com. Just go to the Indexes area, then choose Option B, the index members stock report. Use the pull-down menu to select the various TSX groups, and then choose the option for reports showing percentage share-price change. Once you've got your list, click on the column heading that says dividend yield to order the stocks from highest yield to lowest.

If you're concerned about the trading costs of buying 13 stocks, or if you're worried about buying some of the mangiest of the dogs, then try culling the group down to a more manageable half dozen or so. You might want to consider Torstar, MTS, Norbord, Rothmans, Laurentian Bank, and InnVest.

Share-price gains are by no means assured with these stocks, but at least you'll have dividend income flowing in. If the experts are right, that could be the theme for successful investing in 2005.

rcarrick@globeandmail.ca

DOGS OF THE TSX

Here are the stocks in the 13 TSX sectors with the highest dividend yields. Investing in these stocks is similar to a strategy called Dogs of the Dow, where you buy the 10 highest yielding stocks on the Dow Jones industrial average.

TSXSECTOR COMPANY SYMBOL LATESTPRICE DIVIDENDYIELD STOCK PRICE PERCENT CHANGE1-YR STOCK PRICE PERCENT CHANGE3-YR
Gold Barrick Gold Corp. ABX $27.05 0.94 -6.8% 2.5%
Real estate Brookfield Properties BPO $44.00 1.75 21.1 65.8
Info. Tech Gennum Corp. GND $12.84 0.90 -13.5 -8.0
Financials Laurentian Bank of Canada LB $23.92 4.80 -15.4 -30.8
Telecom services Manitoba Telecom Services MBT $49.14 5.31 9.4 47.0
Health care MDS Inc. MDS $15.99 0.83 -21.8 -19.5
Materials Norbord Inc. NBD $11.85 3.37 43.9 95.3
Metals & mining Noranda Inc. NRD $19.98 2.38 -1.5 26.9
Energy PetroKazakhstan Inc. PKZ $43.53 1.83 40.9 296.1
Consumer staples Rothmans Inc. ROC $40.00 5.03 37.9 59.2
Industrials Russel Metals RUS $14.87 4.77 79.2 286.2
Utilities TransAlta Corp. TA $18.90 5.39 3.0 -14.1
Consumer discr. Torstar Corp. TS.NV.B $21.87 3.21 -24.6 6.2

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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 27/03/24 3:54pm EDT.

SymbolName% changeLast
ABX-T
Barrick Gold Corp
+4.22%21.99
EMA-T
Emera Incorporated
+0.95%47.59
G-N
Genpact Ltd
+1.39%32.76
G-T
Augusta Gold Corp
-1.94%1.01
GM-N
General Motors Company
+1.34%44.59
LB-T
Laurentian Bank
+1.82%28.5
MRK-N
Merck & Company
+4.96%131.75
RUS-T
Russel Metals
+1.37%45.24
TA-T
Transalta Corp
+0.81%8.75
TAC-N
Transalta Corp
+0.94%6.45

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