I received a great letter about Friday's Number Cruncher: These are stocks the bears growl about
Here is an excerpt of it:
Scott,
I could not help but point out a major flaw in your piece Friday titled "These are stocks the bears growl about".
Of the 18 stocks mentioned, a full 9 are income trusts. By definition, these stocks are low growth and high cash payout stocks. Subsequently, these stocks rarely have targets that are 5 per cent above the current stock price. More importantly, all of the income trusts in your list had yields greater than 6 per cent and three of them had yields greater than 10 per cent. In all 9 cases, the income trusts have a positive total return when you consider both the capital change to target as well as the cash yield. In the case of Bell Aliant (my area of expertise), the cash yield is 11.1 per cent and change to target is -0.3 per cent for a combined potential total return of +10.8 per cent - hardly a stock the bears are growling about.
My point is that there is a big difference between the high dividend and low/zero dividend stocks in your screen as well as the type of investor that owns these stocks. Respectfully, I do not think the screening measures support the conclusions for the income focused stocks.
Regards,
Greg MacDonald, CFA Director, Equity Research National Bank Financial
Mr. Macdonald makes an excellent point. It is well worth considering total return if you're thinking about trusts like the ones mentioned in this screen.
But I would add that an important part of the screen is that it only involved stocks/trusts rated "hold" or "sell" according to the median analyst recommendation. In other words, these are stocks that analysts expect to perform in line with the market, or worse. If the analyst consensus rating is correct, then the investor is better off with a dividend/income exchange traded fund than one of these trusts.
As usual, Number Cruncher stock screens are a good starting point for ideas. Be sure to do more research before making an investment decision.
I'm always impressed by the letters we receive about these columns. Thanks to all who write them.