Yield’s great, but it will cost you

By Philip Porado | January 4, 2012 | Last updated on January 4, 2012
2 min read

With managers everywhere chasing dividends, stocks that provide steady income will continue to trade at a premium, says David Graham, CIBC Asset Management, CIBC Monthly Income Fund.

“We’re in a market where stocks that have good dividend yields are expensive,” he says. “When you look at the pipelines or the telecom stocks or other stocks that have good dividend yield, they’re not cheap anymore. The cheaper names are the ones that don’t have the yield.”

Graham expects the income story to last for several more months, and perhaps a year or more.

“It’s a balancing act within the portfolio between names that may be expensive but have a good dividend yield and names that have value.”

In terms of sectors, he’s leaning towards banks, noting:

  • they all have good, solid dividend yields;
  • they made it through 2008 without having any serious problems and are actually in better shape today; and
  • their capital ratios are higher.

He notes they’ve been punished in sympathy to other banks around the world and adds the greatest risks currently for Canadian banks are consumer debt levels and inflated housing prices. These could cause Canadians to borrow less and cut earnings growth to perhaps 5%, more modest than current levels, but he adds banks are reflecting this in their price to earnings ratios.

On the bright side, Graham notes banks didn’t cut dividends in 2008 and likely won’t now. “So I’d collect my dividends and wait for the bank stocks to do better as people worry less about counter party risk and what’s going on in Europe,” he says.

Philip Porado