With interest rates falling on savings, investors may once again be looking at dividend stocks for income.monsitj/iStockPhoto / Getty Images
Investors have been spoiled in recent years with guaranteed investment certificates (GICs) offering a risk-fee, 5-per-cent return.
That’s history now after the Bank of Canada chopped its key interest rate by another 50 basis points to 3.25 per cent in December, while also signalling a slower pace for future interest rate reductions.
With many financial institutions now offering GICs with a 3-per-cent interest rate that could move lower still, it may be time to start looking at dividend stocks with capital-gains potential.
Globe Advisor asked three fund managers for their top picks among higher-yielding dividend payers.
Michael Simpson, portfolio manager, NCM Asset Management Ltd., Toronto
The fund: NCM Dividend Champions
The pick: AltaGas Ltd. ALA-T
AltaGas, which has an energy infrastructure and utility business, has had a 4.39-per-cent dividend growth rate over the past five years and is poised to increase its payout again, Mr. Simpson says.
The Calgary-based firm’s midstream division, which is involved in natural gas processing and transportation, will be able to boost exports to Asia with the expansion of the Ridley Island Propane Export Terminal by next year, he says. Its U.S. utilities business may also benefit from future energy demand from data centres.
AltaGas, which has a yield in the 3.8-per-cent range, is compelling because it trades at a cheaper valuation than Canadian utilities such as Fortis Inc. FTS-T and Emera Inc. EMA-T, he adds.
Risks include interest rates not declining as expected and if energy sources are discovered closer to the company’s Asian customers, he says.
The pick: Flagship Communities Real Estate Investment Trust MHC-U-T
Flagship Communities, an operator of U.S. manufactured housing communities, has managed a 5-per-cent dividend growth rate over the past three years, Mr. Simpson says.
The Fort Mitchell, Ky.-based REIT, whose cash distributions are in U.S. dollars, listed in Canada in 2020 and has been growing through acquisitions in the U.S. Midwest and Southeast markets, he says.
The REIT, which rents lots to homeowners, trades attractively at 11 times funds from operations, he says, compared with private transactions, which are going for 15 to 18 times. It also trades at a discount to his estimate of the REIT’s net asset value at $20.75 a unit.
Flagship Communities, now yielding about 4.2 per cent, has a 54-per-cent payout ratio, he adds, so it can raise its distribution. Tenants failing to pay their rent in an economic downturn is a risk, he says.
Rob Lauzon, chief investment officer and portfolio manager, Middlefield Ltd., Toronto
The fund: Middlefield Income Plus Class
The pick: Guardian Capital Group Ltd. GCG-T
Toronto-based Guardian Capital Group, which offers investment funds and provides institutional investment management, is a deep-value play offering about 3.3-per-cent yield and potential upside, Mr. Lauzon says.
Last year’s acquisition of U.S.-based Sterling Capital Management LLC should be a catalyst for Guardian’s stock because it can grow its business beyond Canada and get merger synergies, he says.
Guardian’s base business is worth about $20 a share but its securities portfolio, which includes about 2.2-million Bank of Montreal shares, is worth about $50 a share, he says. Using a 20-per-cent discount to a sum-of-the-parts valuation, his target price for Guardian stock is $56 a share.
He notes that risks include market corrections that would reduce Guardian’s assets or if management can’t execute its growth strategy.
The pick: Canadian Natural Resources Ltd. CNQ-T
Canadian Natural Resources is a compelling blue-chip energy play because it has increased its dividend for 25 consecutive years, and its stock now yields about 4.6 per cent, Mr. Lauzon says.
The Calgary-based oil and natural gas giant, which has a low decline rate from oil sands assets and high insider stock ownership, should grow total production by more than 10 per cent this year, he says.
Even if oil falls to US$70 a barrel, that will still be profitable for the company, he says. Gas prices should be stronger due to a cold winter, while exports of liquefied natural gas should rise with this year’s start-up of the LNG Canada export facility, he adds.
Mr. Lauzon, who has a $56 target on Canadian Natural Resources stock, says the main risk for the company is falling energy prices. “If you are bearish on oil, don’t buy it.”
Steve DiGregorio, vice-president and portfolio manager, Canoe Financial LP, Montreal
The fund: Canoe Premium Yield Fund
The pick: PrairieSky Royalty Ltd. PSK-T
PrairieSky Royalty is a less risky way to play the energy sector because it earns royalty revenue from oil and gas companies drilling on its land, Mr. DiGregorio says.
The Calgary-based firm, which has a dividend yield in the 3.5-per-cent range, is expected to pay off its debt this year, which could mean share buybacks or increased dividends in the future, he says.
PrairieSky’s shares, which trade cheaply compared with U.S. energy royalty companies, has a payout ratio of about 60 per cent, so there’s room to raise dividends, he says.
Falling energy prices are a risk, he adds, but oil trading at US$70 a barrel is still sufficient for companies to be profitable.
PraireSky would benefit from increased drilling activity if the energy-friendly Conservative Party of Canada wins the next federal election, he adds.
The pick: Restaurant Brands International Inc. QSR-T
Restaurant Brands, a fast-food holding company, has increased its dividend every year over the past decade and now yields in the 3.7-per-cent range, Mr. DiGregorio says.
The Toronto-based company, whose brands include Tim Hortons, Burger King, Popeyes Louisiana Kitchen and Firehouse Subs, is immune to inflation because it has a franchisor model, he says. “The franchisees eat more of the [rising] costs.”
Shares of Restaurant Brands, which reports its financial results in U.S. dollars, trade at a sharp discount to the U.S. market, and its 60-per-cent payout ratio means it can grow its dividends, he adds.
A risk, he says, stems from the company having 40 per cent of earnings in Canadian currency, which could take a hit when converted into U.S. dollars.