Protect the (cash) flow
Sectors and stocks with proven performance
The clouds have been gathering for some time. Now the storm is hitting, and it may be months before the skies clear.
The big market selloff through April and May was surprising only in that it was so long coming. Investors seemed determined to ignore all the warning signs, including the global economic impact of the war in Ukraine, the sudden and rapid rise of inflation, the increasingly hawkish pronouncements of our central bankers, the ongoing supply chain issues, and the lingering effects of the pandemic.
Yes, the markets always climb a wall of worry. But this looks more like a skyscraper.
Recently, a friend who spent many years in the investment industry reminded me of something his mentor once told him: “Once a price trend has been established in either direction, prices go much further than you would have thought possible.”
That’s an ominous thought in a declining stock market.
Many of the S&P/TSX subindexes are down this year. The most notable exceptions are the Capped Energy Index (+67.65% as of the close on June 3) and the Capped Materials Index (up 8.5%).
What’s an income investor to do in this situation? Focus on cash flow, not share prices. Here are some suggestions.
Many conventional energy companies have raised their dividends in response to the rapid rise in the price of oil. Suncor Energy Inc. (TSX: SU) doubled its quarterly payout to $0.42 a share ($1.68 per year) effective with the December payment. It yields 3.6% at the current price. Freehold Royalties Ltd. (TSX: FRU) has boosted its monthly dividend three times since last July. It currently pays $0.08 per share ($0.96 annually) to yield 6.4%.
These are very attractive yields. The problem is they aren’t dependable. Many conventional oil companies, including the two just mentioned, slashed their dividends when oil prices plunged a couple of years ago. Freehold paid only $0.015 per month for most of 2020. Suncor cut its dividend by 55% when the pandemic drove down oil prices. If you’re relying on cash flow from your investments to fund your lifestyle, these are nervous choices.
The Capped Utilities Index is up only 3.2% so far this year, but it represents safer ground for income investors. Utility stocks generally offer a decent yield, with little chance of a dividend cut. The tradeoff is that capital gains potential is limited, but that’s a small price to pay for income security.
There are several utilities I track in my Income Investor newsletter, including Fortis Inc. (TSX: FTS), which is currently yielding 3.3%, Canadian Utilities Ltd. (TSX: CU), which pays 4.6%, Capital Power Corp. (TSX: CPX), with a yield of 5.2%, and Emera Inc. (TSX: EMA), paying 4.3%. These should be your first choice for a conservative, low-risk portfolio.
This sector is up 2.4% for the year. As with utilities, these stocks offered decent yields and the likelihood of any dividend cuts is remote, even if we slide into a recession.
The flagship recommendation here is BCE Inc. (TSX: BCE), which recently raised its quarterly dividend by about 5% to $0.92 ($3.68 a year). The current yield is 5.4%. I also like Telus Corp. (TSX: T), which currently yields 4.1%.
There is no specific pipelines sub-index, but if there were, it would be performing well. Enbridge Inc. (TSX: ENB) is up 19.2% so far this year and is paying a quarterly dividend of $0.86 a share ($3.44 a year) to yield 5.8%. TC Energy Corp. (TSX: TRP) has gained 25.6% year to date and pays a quarterly dividend of $0.90 ($3.60 a year) for a yield of 4.9%. Pembina Pipeline Corp. (TSX: PPL) has seen its stock rise 36.1% this year. It pays a monthly dividend of $0.21 ($2.52 a year), to yield 4.8%.
The Capped Financials Index is off 5.6% for the year, but some individual stocks in the sector are doing better. My recommendation of Bank of Montreal (TSX: BMO) has broken even so far in 2022 and recently raised its dividend by 25% to $1.33 per quarter ($5.32 a year) to yield 3.9%.
Rising interest rates are favourable to banks because they increase net interest margins (NIM), the difference between what banks pay to depositors and what they charge borrowers. It’s unlikely we will see any dividend cuts in this sector, in fact there may be more increases.
To sum up, the coming months are likely to see significant market turbulence. Stock prices may fall farther than anyone expects. Focus on secure dividend-paying stocks and avoid those with a record of cutting their payments in bad times, like the conventional energy sector.
Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.
Notes and Disclaimer
Content © 2022 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.