Dividend stocks have endured a rough year, but investors still seem as enthusiastic as ever about these supposed money machines. Share buyers love the notion of a reliable payout every year, no matter how the market performs.
It’s easy to sympathize with this quest for dependability. But if rates continue to edge higher – and they likely will – bonds will offer increasing competition for dividend stocks. There’s also the risk of a recession to ponder. It has been an unusually long time since the last downturn, so it’s reasonable to expect another slowdown in the next two to three years.
Which stocks are best positioned to weather a new crisis? Presumably it will be ones with strong balance sheets and a bit of financial flexibility. To help spot likely candidates, I searched for stocks in the S&P/TSX Composite Index with dividend yields of more than 3.5 per cent and stellar credit ratings (A-minus or above on Standard & Poor’s scales). I then narrowed the search even further to include only companies that were paying out less than 75 per cent of their earnings as dividends.
Only 14 companies made the cut. In what constitutes a complete non-surprise, six of them were banks and three (Sun Life Financial, Manulife Financial and Great-West Lifeco) were large insurers. Add in Power Financial and IGM Financial and the list tilted overwhelmingly toward the financial sector. Only a handful of utilities – Atco, Canadian Utilities and Hydro One – crashed the party.
All of these dividend payers are worthy of more research on your part. But let me add a note of caution. As rock-solid as these companies may be, none of them are risk-free. Canadian banks will feel the pain if the housing sector ever turns cold. Insurers will be hit hard if markets decline and their investment portfolios, and assets under management, shrink. Even utilities face the threat of regulatory clampdowns, government intervention or environmental challenges.
Dividend investors who want to build a true security blanket should diversify widely and not just among the stocks shown here. If there’s one lesson to be learned from the last crisis, it’s that troubles can appear in the most unexpected places. The accompanying list can provide a good starting point for conservative investors, but it shouldn’t constitute the whole of your portfolio.