Dividends remain the smart play

By Staff | February 21, 2012 | Last updated on February 21, 2012
3 min read

While the day-to-day headlines can mask the underlying trend, it appears that the world is slowly getting its economic act together. Europe is gradually coming to grips with the debt problems of its peripheral nations, while the U.S. creeps ever so slowly toward renewed prosperity.

Still, it’s not quite time to abandon the relative safety of dividend-paying stocks, says David Graham, vice president, equities, portfolio manager of the CIBC Monthly Income Fund.

He points out that the risk of a European bank default has greatly diminished, as the European Central Bank has effectively enacted a quantitative easing policy to help backstop the banks. In the U.S., retail sales are gradually improving, as are the unemployment rate and personal income levels.

“All of that is leaning toward the positive,” he admits.


“There is still a risk of a policy misstep in Europe; that they’ll put the thumb down too hard on Greece or other countries to cut back on their budgets,” he says. “In the States, there’s the risk that the politicians can’t quite agree, so there’s a chance of a misstep there as well.”

Given that this is an election year in the U.S., the risk of political disagreement is probably north of 98%, so investors might be well-advised to stock with a “safety first” mentality.

“I don’t think the dividend or yield theme has gone away, so I still favour equities,” Graham says. “The key is to not put all of your eggs in one basket and have a diversified portfolio, because you don’t know what headline might come along tomorrow.”

He gives the example of the Canadian telecom sector, a darling of dividend investors as it typically provides few scares and churns out regular cash payments. But now there is a widespread expectation that the federal government will allow foreign companies to buy smaller players that have less than 10% national market share.

“If they allow [foreign ownership], that could be perceived as a negative for BCE or Telus,” he says. “I don’t see it as a serious negative; but they would go down for a couple of days until we see what happens.”

To brace for such an announcement, he’s reduced his holding in BCE, shifting the capital to Manitoba Telecom, which at the time of the trade had the same 5.2% yield, but would be a potential buyout target due to its much smaller scale.

“Dividend yielding stocks are all getting to be on the expensive side,” he says, pointing out that if investor sentiment shifts toward a more bullish stance, dividend stocks will likely sell off in favour of growth companies.

“At present, they want dividends to protect them on the downside, but as confidence comes back they may shift toward other names.”

He likes the oil sector, as the price of crude has passed the $100 a barrel mark, but oil producers are trading at a discount reflecting $75 or $80 crude. But his bullishness does not extend to the natural gas sector, as the mild winter likely means storage facilities will remain full heading into spring, further weakening the already low price of gas.

Advisor.ca staff


The staff of Advisor.ca have been covering news for financial advisors since 1998.