The whole-grain goodness of blue-chip dividend stocks has its
Utility stocks, consumer staples, pipelines, telecoms, and REITs
have all lost ground over the past month, even while the broader
market has been flat. With the bond market signaling an expectation
of rising interest rates, the five-year rally for steady blue-chip
dividend payers has stalled.
Should you be scared if you own a lot of these stocks, either
directly or through mutual funds or
? David Baskin, president of Baskin Financial Services, has a
two-pronged answer: Keep your top-quality dividend stocks, but be
prepared to follow his firm's example in trimming holdings in
stocks such as
Let's have Baskin run us through his thinking on dividend
stocks, which are a big part of the portfolios his firm puts
together for clients. A mini-manifesto for the managers at his
firm: "We like low-beta stocks, we like a nice yield, and we like a
history of raising dividends." Low beta means less volatility than
the broader stock market.
Dividend stocks have had an amazing run in the past few years,
and far outperformed the broader stock market. They've helped
investors panicked by the 2008-2009 crash make friends with stocks
again, and they've helped ease the mind of income-seeking investors
appalled at how little bonds and guaranteed investment certificates
But no theme in investing is successful all the time. You can
see this in the way dividend stocks have been manhandled by
investors looking ahead to market conditions where growing revenues
and profits become more important than steady dividends. As of late
this week, the Canadian S&P/TSX REIT, utilities, and telecom
indexes had one-month losses of 7.6%, 7.1%, and 2.5%,
Baskin believes the sell-off of dividend stocks was excessive,
but unsurprising at a time when bond yields have surged higher. The
simple explanation of the interplay between bonds and dividend
stocks is that higher yields on the kind of low-risk bonds issued
by governments and blue-chip corporations make the yields on
higher-risk stocks look less attractive.
In Canada, the yield on the five-year Government of Canada bond
has gone from 1.15% on May 1 to 1.44% late this week, a very
significant jump by the standards of the bond market.
Baskin points out that the 50-year average yield for the
five-year Canada bond is 5%, which is a reminder that we are still
at historically low levels for bond yields. So low, in fact, that
yields from blue chip dividend stocks continue to be a lot more
generous, and that's not even considering the benefits of the
dividend tax credit in non-registered accounts.
According to Baskin's data, the dividend yield on the
S&P/TSX composite index is 2.8%. Except for the past few years,
where interest rates have been at historical lows thanks to the
global financial crisis and recession, five-year bond yields have
been higher than dividend yields every year since the 1950s.
Today, Baskin estimates that the yield on widely held dividend
stocks can be nearly three times better than bond yields on an
after-tax basis. That's one reason for not being hasty about
dumping dividend stocks.
Another is the potential for dividend growth, which in practical
terms means a rising stream of income. Already this year, there
have been dividend hikes from the big telecom companies, banks, and
"Right now, we're in a golden age of dividend increases," Baskin
said. "It's not just the yields you're getting today, it's the
yield you'll get in the future as dividends get increased."
Finally, Baskin believes central banks in Canada and the United
States will be very cautious about allowing interest rates to move
higher, given lingering questions about the strength of the
economy. He said short-term interest rates won't increase by more
than one percentage point in the next two years, though longer-term
rates may rise more.
Don't give up on dividend stocks, but don't be complacent about
them, either. Many of these companies have performed brilliantly in
the past five years and have now become expensive.
Take Keyera, a provider of services to the oil and gas industry
whose stock has risen a cumulative 165% in the past five years, and
now yields 3.6%. "We trimmed a quarter of our holdings in Keyera
when it got over $60," Baskin said. "It's a good stock and we love
the yield, but it's really expensive."
Similarly scrutinized stocks in Baskin Financial client
portfolios include Pembina and TransCanada. The stocks were reduced
by roughly one-third or one-quarter, not sold outright.
"People have this thing in their mind that it's either buy a
stock or sell it," Baskin said. "There's no reason why you can't
sell a quarter of it or a third of it. We do it all the time."
Money pulled out of dividend stocks held in Baskin Financial
accounts has for the most part been invested in US stocks. In fact,
the firm has more US stocks in its portfolios than at any time
Some of the most recent buys include
Dr. Pepper Snapple Group
Bed Bath & Beyond, Inc.
(BBBY). (However, one rule the firm has for buying US stocks is
that the Canadian dollar has to be worth more than 95 US
While dividend-heavy sectors such as utilities and telecom were
falling in the past month, economically sensitive sectors like
materials, energy, and industrials were on the rise. Baskin said
his firm owns some
(MG) and some lumber companies to participate in the US housing
rebound. But he's not moving into resource stocks in a big way
until it's much clearer that the economy is strong.
In any case, Baskin said he doesn't like the volatility and low
yields of commodity stocks. You don't have those issues with REITs
and utility, telecom, and pipeline stocks, even if they have been
roughed up lately.
Editor's Note: This article was written by Rob Carrick,
reporter and columnist for
The Globe and
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