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Craig Jerusalim, senior portfolio manager at CIBC Asset Management.
Three sources of dividend growth that I see on the TSX can come from banks, telcos and gold. Bank stocks tied to the resumption of economic growth, telcos as a misunderstood and underappreciated sector, and gold, an unloved and often overlooked area.
Let’s start with the banks. The caveat here is that the banks can’t raise their dividends until OSFI lifts the moratorium on the big banks. But by the way things are shaping up, that is likely to come in the second half of 2021. Looking at the growth in housing and the strength in mortgages, extremely strong and robust capital markets, and given the strong outperformance in equity markets, asset management is also off to another strong year. Banks likely won’t release provisions that they took during the depths of the Covid crisis. But at some point it will become a tailwind given the healthy capital level well above the required minimum levels needed for OSFI to lift that moratorium.
Next on the telcos. The telcos don’t get the respect that they deserve despite offering a vital service like internet and wireless phones, akin to electricity or water. But they don’t come close to the valuation multiples of the utilities or even the pipelines. Under normal circumstances, let alone under these extreme periods of work from home, I would sooner give up my running water than my high-speed internet. So a company like Telus, who now has a declining capital intensity profile following their big fibre spend, and despite the upcoming 5G spend, they’ll be growing their free cash flow available to shareholders and have affirmed their 7% to 10% dividend growth targets for the next few years.
Then finally on gold. Although gold has had a hard time stabling at these higher levels, many gold companies, specifically the senior producers like Barrick and Newmont and Agnico, are generating very attractive cash flows and will continue to reward shareholders with dividend increases and special dividends, similar to the recent announcements by Newmont and Barrick. A company like Newmont now has a dividend yield greater than the TSX average once those special dividends are incorporated into their payouts.
So there you have three diversified sources of dividend growth on the TSX that should lead to outperformance.
And maybe a final dark horse sector that could also contribute to dividend growth is the energy sector. With oil prices rising to where they are, many of the Canadian producers are now generating excess cash flows that can be used to return money to shareholders through dividends and buybacks. Companies like Suncor and CNQ, the largest and most consistent energy producers in Canada, are the companies that are likely going to be the most consistent growers of those dividends over time, given their scale advantage and their long-life assets.