Scotiabank’s global research team has unveiled a new list of dividend-oriented stock ideas designed for a rising rate environment. Named The Dividend Yield Champions, they are more than two dozen ideas primarily based in Canada but U.S. and Latin American names are also provided.
Recent performance in both Canadian and U.S. dividend exchange-traded funds has been poor. Domestically, the iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (CDZ-T) and the iShares S&P/TSX Composite High Dividend Index ETF (XEI-T) have generated positive returns year to date, but have significantly underperformed the S&P/TSX Composite Index. In the U.S., only three of the largest 10 dividend ETFs are higher.
The reason for income stock underperformance – competition from drastically higher bond yields – is not going away soon. With this in mind, Scotiabank strategist Hugo Ste-Marie surveyed the company’s analysts for stocks with current yields over 3 per cent and with expected cash flow and earnings growth high enough to support dividend increases in 2024.
Energy stocks play an outsized role on the list. Scotiabank analysts believe that the sector’s financial discipline makes it a more reliable source of income. A number of energy companies have successfully paid down debt and have announced intentions to returns more cash to shareholders.
Mr. Ste-Marie views dividends as a “lagged function of earnings,” which means that consensus expectations for 11 per cent earnings growth for S&P/TSX Composite stocks in 2024 will support dividend hikes.
Onto the list itself. The Canadian stocks are Brookfield Asset Management, Canadian Natural Resources, DRI Healthcare Trust, Endeavour Mining, Exchange Income Corp., Granite REIT, Labrador Iron Ore Royalty Corp., Manulife Financial Corp., Maple Leaf Foods, Northland Power, Parkland Corp., Power Corp. of Canada, Russel Metals Inc., TC Energy Corp., Telus Corp., and Topaz Energy Corp. The international names are Aguas Andinas, Ambev SA, Banco do Brasil, Brixmor Property Group, Enterprise Products Partners LP, Kimberley-Clark de Mexico, Neoenergia SA, Terrafina, TIM SA, UDR Inc., Vale, Walmex and WEC Energy Group Inc.
-- Scott Barlow, Globe and Mail market strategist
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The Rundown
Harsh reality of ‘higher-for-longer’ rates looms over stocks
For most of the year, equity investors brushed off a rise in Treasury yields as a by-product of better-than-expected economic growth, despite worries that yields could eventually weigh on stocks if they rose too high. Those concerns may be taking on fresh urgency after the Fed last week forecast it would leave rates elevated for longer than many investors were expecting. With policymakers projecting rates will remain around current levels until the end of 2024, some investors say more volatility could be in store.
Also see: ‘Unknown unknowns’ unnerving markets for Q4
Dividend-paying stocks will be far more important than in the past
It hasn’t been a joyful year for dividend investors. The surge in bond yields - and expectations they will stay high for a prolonged period - means a lot more competition for dividend stocks when it comes to investment dollars. But veteran fund manager Tom Czitron believes dividend stocks are still an excellent bet for the longer term. He believes the era of cheap capital costs and malinvestment is over, which will be painful for glitzy growth stocks. Dividends will be far more important than in the past, he says, and he outlines a few to buy during the current selloff.
Don’t fall for the Japanese investor tease
There’s been a lot of enthusiasm for Japanese stocks of late. But billionaire investor Ken Fisher thinks a lot of this is Wall Street cheerleading Japan’s meagre economic reforms and backward-looking, hollow data. Hype and heat are bad reasons to invest heavily anywhere, he says, and for those who do want to buy some stocks in the country, he suggests selectively where to look.
Oil price rally set to falter as demand doubts loom
Oil prices may be near $100 a barrel, but a range of factors could prevent a sustained rally above that level, analysts say.
China’s strong metal imports not as bullish as they seem
China’s appetite for base metal imports appears to be growing. Refined copper volumes hit a year-to-date monthly high in August and primary aluminum imports were the highest since November 2021. Higher imports would seem to fit the bullish narrative that the Chinese government’s piecemeal stimulus program is gaining traction and the world’s largest buyer is recovering its metallic mojo. However, as veteran metals journalist Andy Home reports from London, robust copper and aluminum imports come with important caveats and the broader metals trade picture is far more mixed.
Others (for subscribers)
Number Cruncher: Seven Canadian REITs worth considering in the home stretch of interest-rate hikes
Number Cruncher: 12 U.S. stocks setting the pace for operational performance
Wednesday’s Insider Report: Billionaire businessman Eric Sprott invests in this stock nearing oversold territory
Wednesday’s analyst upgrades and downgrades
Scott Barlow’s Noteworthy: Why a cyberattack on Las Vegas slot machines shouldn’t be ignored by investors
ETFs may face approval delays, volatility if U.S. government shuts down
Tuesday’s analyst upgrades and downgrades
Globe Advisor
Is increasing risk tolerance in portfolios to make up for recent drops in valuations a good idea?
Live chat with Starlight Capital CEO Dennis Mitchell: Why sector selection, not location, is key to real estate investing
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What’s up in the days ahead
Is Aritzia a buy ahead of earnings this week? David Berman will share some thoughts.
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Compiled by Globe Investor Staff