Investors’ attraction to dividend-paying stocks need not be tempered, especially considering recent monetary policy.
In a turnaround from its four interest rate hikes in 2018, the Federal Reserve cut rates three times this year in response to rising global risks. While Canada’s central bank has held its key rate in the last year, some experts forecast a rate cut in early 2020.
The return to easing is “a dramatic shift” in which certain dividend-payers have performed “incredibly well,” said Colum McKinley, managing director and chief investment officer at CIBC Asset Management, in an Oct. 10 interview.
Top performers include telecoms and REITs. “When these businesses are strong and stable, they become a very attractive alternative for investors looking for a source of yield or dividend income,” McKinley said.
McKinley said telecom companies are “stable” businesses because of their underlying relationships with customers, who sign contracts and pay monthly bills.
“It’s basically an annuity,” said McKinley, who manages the CIBC Monthly Income Fund. The relationship with customers “contributes to the steady cash flows that companies generate, [which] allows them to pay consistent dividends and to grow those dividends over time.”
One company he likes is Telus, which offers a yield of 4.7%.
“Over the last five years, that dividend has grown in excess of 8% a year,” McKinley said. “Not only do you get an attractive yield today, they have consistently grown that dividend over time.”
However, investors must also consider risks, one of which is the challenge of further market penetration.
“The number of people who have cellphones today is near record highs,” McKinley said. “In fact, I have a hard time finding people who don’t have cellphones today.”
He also monitors policy. As part of their platforms for the Oct. 21 election, the Liberals promised to lower cellphone bills and wireless services by 25% over two years, and to introduce competition into the sector if companies don’t meet that target, while the NDP promised price caps.
“We’ll monitor and watch that closely but, at this point, we’re not too concerned about that threat,” McKinley said.
Most REITs offer a yield of 4% to 7%, backed by hard assets like office and retail buildings and industrial warehouses, McKinley said.
Year to date, the S&P/TSX Capped REIT Index is up 17.6%. And if market volatility increases, REITs will offer protection, said McKinley, who uses them as a way to build defence in portfolios.
One example is Quebec City–based Cominar, a REIT with a diversified mix of office, retail and industrial assets.
The company has experienced positive changes, with four new board members in the last year, representing potential for new ideas, McKinley said.
Management has also changed significantly, with a focus on reducing costs, strengthening the balance sheet and improving execution.
“Improving execution means better occupancy at the properties and more effective development of their existing assets,” McKinley said.
The changes are expected to “lead to positive things for investors,” he said.
Cominar already yields more than 5%. With early evidence of improved execution, along with expected dividend growth, share buybacks and improved profitability for shareholders, the stock is “a very interesting opportunity in the market today,” McKinley said.
This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.