The end of 5-per-cent returns from GICs and similarly safe products has started the revival of downtrodden blue-chip dividend stocks.
In recent months, stocks like TC Energy Corp. (TRP-T), Fortis Inc. (FTS-T), Emera Inc. (EMA-T), Enbridge Inc. (ENB-T), Canadian Imperial Bank of Commerce (CM-T) and Rogers Communications (RCI. B-T) have delivered strong returns. There is more to come, a report from CIBC Capital Markets says.
The report says about $220-billion was diverted away from high-yielding dividend stocks in the past couple of years by guaranteed investment certificates, investment savings accounts and high-interest savings exchange-traded funds. Yields on these and similar products got as high as 5 to 6 per cent at the peak and have since declined to between 4 and 5 per cent at best. The result is that high-yielding dividend stocks are looking better and better.
”Given our thesis that the surge in interest rates has disproportionately damaged Canada’s high yield sectors, it makes sense that the recent fall in rates across the curve would argue for a reversal,” the CIBC report says. “This has already begun – or arguably has already happened.”
Each of the above-mentioned stocks was up between 6.5 and 8.5 per cent for the past 30 days. Even so, yields remain between 3.7 per cent for Rogers to 6.9 per cent for Enbridge. With inflation at 2.5 per cent and expected to decline, dividend stocks in defensive sectors such as pipelines and utilities have some appeal.
CIBC’s report singled out four traditional stock market sectors favoured for their yield – real estate, utilities, telecom and financials. “Simply put, there is as much as 15 per cent of the current market cap of these sectors that might return if rates continue falling,” the report says.
Some thoughts for investors who want to capitalize on further gains from once-downtrodden dividend stocks:
- Consider a sector ETF: There are ETFs tracking the TSX financials and utilities sectors, as well as real estate investment trusts. There are also straight bank plays in the ETF world if you want to focus on them exclusively and leave out insurers and investment companies.
- Consider a low-volatility ETF: Low-vol funds tend to have a high concentration in sectors like financials, consumer staples and utilities.
- Favour Canada over the U.S. market: CIBC’s report documents how yields are higher for Canadian stocks compared to similar U.S. players. For example, Enbridge’s 6.9-per-cent yield compares to 5.7 per cent for Kinder Morgan Inc. (KMI-N).