Barlow’s Research Roundup: ‘Dividend yield alone is unlikely to pay off’ warns Scotiabank strategist

Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

Growth and dividends

Scotiabank strategist Jean-Michel Gauthier warned clients that dividend yield alone is now unlikely to pay off,

“Focusing on Dividend Yield Alone is Unlikely to Pay Off - Investors Need to Assess Dividend Growth/Quality as Well. With bond yields reaching back to pre-financial crisis levels, the question of buying stocks for yield vs. buying bonds has turned visibly in bonds’ favour: Canadian 10-year bonds are now paying a 187 basis point premium over the TSX Composite’s 2.1-per-cent dividend yield, itself at its lowest since 2006 when REITs were included in the index. This marks a departure from the 2008 to 2024 era when bond yields were usually yielding similar to or less than stocks. To keep competing, stock dividend strategies might thus be tempted to reach for yield by focusing on companies yielding the highest dividends. We believe this could lead to suboptimal returns compared with a strategy of screening for high quality dividend paying companies (i.e. incorporating dividend growth, dividend security, defensiveness, and quality metrics on top of dividend/buyback yields). Simply focusing on high dividend yielding companies can expose investors to ‘yield traps’ (high yielding companies about to cut their dividend). Moreover, when decomposing macro factor exposure of dividend yield strategies, high dividend yielding companies are much more dependent on credit spreads narrowing (being in a risk-on market) as this usually mean they can grow their way out of a high payout situation”

Stocks on the strategist’s top 30 quality high payers are Magna, Imperial Oil, Suncor Energy. Endeavour Mining PLC, Thomson Reuters, Canadian Tire, Quebecor, Canadian Natural Resources, Empire, Open Text, Lundin Gold, Intact Financial, Tourmaline Oil, Stella-Jones, Whitecap Resources, Metro, Great-West Lifeco, Manulife Financial, IA Financial Corp, CCL Industries, TMX Group, Sun Life Financial, Canadian National Railway, Cenovus Energy, CGI, Brookfield Infrastructure Partners, Restaurant Brands, Saputo, Canadian Apartment Properties and Premium Brands Holdings.

Office and industrial REITs

RBC Capital Markets real estate analyst Pammi Bir assessed the market environment for industrial and office REITs,

“Our view: Overall, encouraging takeaways from CBRE’s Q3/26 office and industrial updates. With a moderate growth economy and muted new supply, we expect office vacancy to gradually fall further and support REITs with exposure. However, we remain sidelined on AP (6.8-per-cent implied cap) and D (7.6 per cent). Amid the run-up in bond yields, we see greater relative FFOPU and NAVPU erosion risks given their high leverage (AP 12 times D/EBITDA, D 11.5 times). Our 104-per-cent 2026E AFFO payout ratio for AP also leaves minimal room for error. For D, its second largest tenant, International Language Academy of Canada (4 per cent of revenue, 132K sf) recently filed for bankruptcy, creating further downside risks to estimates. As some of the space is subleased, we estimate D’s net exposure at 85K sf (9 per cent of our 2026E FFOPU). As it’s early days in the process, we expect an update with Q3 results. In industrial, accelerating demand drove the sharpest QoQ drop in availability since 2022, while market rents held steady. We see momentum as supportive of our industrial picks, DIR (7.1-per-cent implied cap), GRT (6.6 per cent), PRV (6.8 per cent). Combined with their lower relative leverage, we see stronger insulation from rising rates. Bottom line, we like the entry points here”

Global contenders

One Canadian(-ish) company remains on BofA Securities global quant strategist Nigel Tupper’s Contenders list of stocks making it through his screen for lowest PE stocks with above average earnings momentum and price momentum,

“Inexpensive momentum strategies continue to marginally outperform globally. Performance of inexpensive momentum is stronger in Asia. Last month, the Global Contenders (down 2.7 per cent) outperformed the Defenders (down 3.7 per cent) by 1.0 per cent but underperformed the MSCI AC World index (down 1.3 per cent) by negative 1.4 per cent. The 12-month performance spread between the Global Contenders and Defenders is 22.0 per cent. In Asia last month, the Asia Pac Contenders (up 2.6 per cent) outperformed the Defenders (down 0.8 per cent) by 3.3 per cent and the MSCI APxJ Index by 3.8 per cent, extending the 12-month performance spread to 56.6 per cent. The new Global Contenders this month are Standard Bank, Fortinet, and Gen Digital. The longest standing Contender is Citigroup (24 months). The other Global Contenders are Hana Financial, Kia, United Microelectronics, Wiwynn, AerCap, Anheuser-Busch, Bayer, BNP Paribas, Mitsui O.S.K. Lines, Alphabet-A, Broadcom, Bunge, Cummins, CVS Health Corp, GM, Halliburton, Jabil, KLA, Live Nation, Magna Int’l, Micron Tech, Royalty Pharma A, Seagate Tech, State Street, Steel Dynamics, and Vertiv”

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Diversion

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