Dividend investors, your time has come. Well, maybe.
The Bank of Canada cut its key interest rate on Wednesday morning by a quarter of a percentage point, marking the first turn in monetary policy in more than two years.
This one cut, which follows 10 consecutive rate hikes since early 2022, might not be enough to trigger a rally in dividend-paying stocks right away. However, it bolsters the view that the single biggest drag on these stocks over the past two years is about to let up.
If the central bank follows this rate decision with more rate cuts later in the year, as the threat of inflation subsides or economic clouds gather, all the better.
Dividend-paying stocks have been struggling over the past two years as rising interest rates attracted investors to other income-generating investments, such as bonds and guaranteed investment certificates (GICs).
The difference between the performance of dividend stocks and the broader market is striking.
The S&P/TSX Composite High Dividend Index – which tracks 75 stocks, including Bank of Montreal (BMO-T), Enbridge Inc. (ENB-T) and Telus Corp. (T-T) – has delivered a return of only 0.5 per cent over this two-year period.
It lags the total return of the broader S&P/TSX Composite Index by 13 percentage points. These returns include dividends.
The difference is even more stark in the United States, where the Federal Reserve’s aggressive rate-hiking response to inflation has also weighed on dividend stocks.
The S&P 500 High Dividend Total Return Index – which tracks the performance of 76 stocks, including Duke Energy Corp. (DUK-N), Best Buy Co. Inc. (BBY-N) and Verizon Communications Inc. (VZ-N) – has delivered a total return of 1 per cent over this same two-year period. The index has trailed the S&P 500 by 34 percentage points.
Rising yields, largely a consequence of falling share prices, tell a similar story about the recent performance of dividend stocks, especially in Canada.
The yield on the S&P/TSX Composite High Dividend Index is currently hovering around 5.5 per cent. That’s up from a recent low of 3.9 per cent in February 2022, before the Bank of Canada began to hike rates.
Now, some market watchers expect that these trends will start to move in reverse: Rate cuts will make dividends look more attractive relative to bonds and GICs, underpinning a rebound.
There are other aspects to this bullish case.
In several reports on dividend stocks this year, Bank of America strategists argued that dividend stocks are cheap and unpopular among investors, making them a compelling bet on rebounding sentiment alone.
The strategists, who declared 2024 as a “banner year” for dividend stocks, added that trillions of dollars are parked in U.S. retiree accounts, in the form of cash. As interest rates decline, the returns on this cash will diminish, providing a powerful incentive for investors to pursue other investments – notably, dividend stocks – that can generate attractive income.
Nonetheless, some observers caution that this first rate cut by one central bank is a small step, and as a result, the recovery in dividend stocks might not be swift, or particularly dramatic. I get further into those arguments here.
-- David Berman, investing reporter
Also see:
Most economists think another BoC rate cut is coming in July. Markets aren’t nearly as sure
Nobel-prize winning economist Paul Krugman says the Fed needs to cut interest rates - and soon
This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.
Stocks to ponder
Element Fleet Management Corp. (EFN-T) This Toronto-based firm is a leading fleet management company with operations in North America, Mexico, Australia and New Zealand. Its share price is nearing a record high, with a current dividend yield of 1.9 per cent. Jennifer Dowty reviews the investment case.
Southern Company (SO-N) U.S. utility stocks are producing sizzling returns this year, but they are now expensive relative to their earnings. Gordon Pape says this is one he likes that’s still going for a reasonable price.
Corby Spirit and Wine Ltd. (CSW-A-T) A year ago Corby announced it would acquire Ace Beverage Group in a transaction that would fundamentally change the company and alter its trajectory. Philip MacKellar of The Contra Guys looks at how the deal has gone down so far, and tells us why the beverage producer is one of his top income picks for 2024.
Tesla Inc. (TSLA-Q) Reuters reports on how some of the company’s institutional shareholders are getting out, convinced that the electric carmaker’s days of dizzying growth are in the rear-view mirror.
The Rundown
Should you take advantage of a lower capital-gains inclusion rate?
Investors across Canada may be considering whether they ought to trigger their capital gains before they are taxed at a higher inclusion rate. Is it time to sell now? After all, if it’s a good holding, can’t we repurchase it soon after? Can’t we pay the taxes at the lower rate now and thus save in the future from paying a higher rate? As portfolio manager Dov Marshall tells us, there are three factors to be aware of which will determine what you should do now.
‘Modi premium’ in India’s financial markets set to erode after weak victory
Indian voters’ tepid endorsement of Prime Minister Narendra Modi leaves a weakened mandate for business-friendly reforms and has foreign money managers thinking twice about unleashing another wave of investment in the world’s fastest-growing economy.
Also see: Unwinding of hugely popular currency trade rocks markets
Want to understand GameStop’s rally? Let’s talk about Trump, Nvidia and Taylor Swift
In a year when a former U.S. president has become a convicted felon, bitcoin has rallied 70 per cent and Taylor Swift’s surging in popularity has been drawing comparisons to Beatlemania, perhaps it is little wonder that meme stocks are back in the spotlight. As David Berman reports, the latest version of the meme-stock phenomenon arrives when nothing seems out of the ordinary any more.
Others (for subscribers)
Number Cruncher: 10 U.S. utility stocks gearing up for the hot summer
Wednesday’s analyst upgrades and downgrades
Tuesday’s analyst upgrades and downgrades
High bond yields should prompt reversal of 60/40 portfolio, says PIMCO
What’s up in the days ahead
Scott Barlow will tell us why any rally in the Canadian dollar won’t last.
Click here to see the Globe Investor earnings and economic news calendar.
More Globe Investor coverage
For more Globe Investor stories, follow us on Twitter @globeinvestor
Compiled by Globe Investor Staff