Dividend Investing

Quarterly Review of Your Stocks Made Easy

Quarterly review of your stocks made easy! That’s what I aim to do in this post. Reviewing your holdings’ quarterly results and your reasons for holding each stock to begin with are essential. It makes you confident that you have a resilient portfolio that suits your needs and that protects your retirement.

Finding the information

You’ll find most of the information you need in the companies’ quarterly results press releases. You can also look at their quarterly reports, management discussion and analysis (MD&A), and filing documents. Go to each company’s website, in the Investor Relations section. Dividend Stocks Rock members get links to the press releases in their quarterly reports and see trends for many metrics on stock cards.

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Trends and anomalies

Graphs showing an emerging trend of growth for revenue and EPS. — The trend is your friend

Reviewing results isn’t simply checking that sales and profits grew compared to last year. You must also look at the trends, i.e. the evolution of revenue, profit, dividend, etc., over time to see whether the company consistently succeeds. The trend is your friend. Also, when results show something unusual, going against the trend, investigate.

For example, you see a sharp drop in sales for a company that has increased its sales every quarter over five years. Do you panic and sell the stock? No, you investigate to see if it’s a temporary setback. Maybe the company had to shut down production when a storm damaged its facility or a ship stuck in the Suez Canal led to a shortage of raw materials.

Revenue growth

In the most recent quarterly results, look for the company’s revenue or sales. Revenue includes money made from sales and other sources, such as investment income.

1 – Compare the revenue number with the comparable period, also called the year-ago period. This is the same period of the year but a year ago. If you’re looking at Q2 revenue, compare it with Q2 revenue from a year ago.

2 – Has the revenue grown, is it flat with last year’s, or has it decreased? By how much in percentage?

Generally, 1% isn’t much, single-digit growth or decline is moderate, while double-digit growth (10% and more) is solid. Of course, that varies across industries and companies; 10% growth in a quarter for a company will disappoint if it had been growing its sales by 20% every quarter for two years.

3 – Look at the company’s quarterly revenue trend over five years. Does the trend show growth over five years? It is steady growth or accelerating? Is the trend showing a decline?

Is the most recent revenue figure within the trend or is it unusually good or bad? If it’s unusual, investigate the cause. The press release often explains exceptional conditions or one-time events that caused an anomaly.

Profit Growth

You also compare the company’s profit with that of the prior-year period. The profit is called net income or net earnings. The easiest metric to use for profits is the Earnings per Share (EPS) metric. EPS is a metric that divides the company profits by the number of shares.

One-time or unusually large expenses, for example, a lawsuit settlement or a product recall, affect EPS. Companies often provide another metric called the Adjusted EPS (or normalized) that excludes such unusual items to provide a value that is more comparable to that from the prior-year period.

1 – Observe whether the EPS (or Adjusted EPS) has grown, is flat, or has decreased, and by how much in percentage.

2 – Look at the EPS trend over five years. Is the company growing its profits, is it stagnating, or in decline? Is EPS growth or decline steady or accelerating?

Accelerating growth hints at a thriving company that executes well while an accelerating decline is a problem.

3 – Are the most recent EPS within the trend or unusual? For unusual EPS, investigate.

If there was a sharp sales drop, EPS falling is not surprising. If EPS falls more than sales or falls while sales increase, perhaps the company costs have risen due to inflation, shortages, etc. Maybe the company lowered its prices to customers to drive up sales, reducing profit margins at the same time.

For some industries with large amounts of depreciation, such as utilities and REITs, EPS can be misleading. Other metrics such as distributable cash flow (DCF) per share or funds from operations (FFO) per share are more appropriate.

Dividend Growth and Safety

Compare the most recent dividend amount paid or announced with the dividend paid in the previous sequential quarter, i.e., when looking at the Q3 dividend, compare it to Q2 rather than Q3 of the previous year.

1 – Has the dividend increased? Is it the same? Was it cut? I usually don’t hold on to companies that cut their dividends.

2 – If there wasn’t a dividend increase, look at the dividends paid over the last 12 months; was there an increase in the last year? A yearly dividend is a minimum for a dividend growth investor.

3 – How much was the dividend increase in percentage? Does it at least match inflation? Companies that don’t consistently match or exceed inflation don’t protect your income in the future.

4 – Look at the dividend trend over five years. Is there yearly growth? Is growth accelerating, steady, or slowing down? Often, dividend growth that slows down is the first sign of a dividend cut in the future.

5 – Look at the company’s payout ratio. This ratio identifies how much of the profits the company pays out in dividends. We all want generous dividends, but if a company pays more than it earns, that’s not sustainable. Compare the latest payout ratio with the payout ratio trend over five years to see whether it is normal for this company, higher or lower. You might also want to look at the cash payout ratio; for some industries, you should look at other payout ratios that are more appropriate.

6 – Look at the company’s cash from operations amount and see the five-year trend. Companies that generate increasing amounts of cash from operations are in a good position to keep paying and increasing their dividends.

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Company’s future

Now that you know how a company performed and how it’s evolving, look at what’s in store for that company in the future. Will it be able to keep growing for years to come? Are there risks heading its way? Some things to look for include:

Mergers and acquisitions that bring challenges but also growth opportunities.
Company getting rid of non-productive assets or brands to improve their future results.
Announcements about new products, expansion in new markets or business areas.
Capital expenditures (CAPEX) invested in infrastructure; is it likely to bring revenue growth?
The company’s outlook for the full year, or the new year.

Interpreting a Weak Dividend Triangle – Part 2

Worried about holdings that show a weak dividend triangle? Revenue and EPS are falling, dividend growth is slowing down, or worse absent. What do you do? Last week we explored how to analyze falling revenue in a weak dividend triangle. Now we look at interpreting weak EPS and dividend growth.

In last week’s article, we explained the importance of putting metrics fluctuations in context and that the trend is your friend, meaning you must look at the evolution of metrics over time to understand what’s going on. Missed it? Read it here.

When earnings per share (EPS) are down

Earnings going down means the company is making less profit, not something that you like to see. Again, however, you must put that in context.

First, understand where that number comes from. EPS is based on accounting principles. Consequently, major events like impairments, one-time charges for an expansion and acquisition, and amortization impact the EPS even though these events aren’t necessarily bad things. Seeing the EPS go down raises a flag regardless, and it must be investigated. Reviewing the trend in Adjusted EPS (also called non-GAAP) can help here because one-time charges and amortization are not included.

Companies that make a lot of investments in assets or infrastructure have a lot of amortizations, and their EPS fluctuation often causes confusion.

Example: Brookfield Corporation (BN.TO / BN)

Recently, at the same time Brookfield Corporation (BN)’s EPS was going down, it announced a generous dividend increase. A business whose profit is plummeting is raising its dividend. “I’m losing my job I think I’ll buy a car.” It doesn’t make sense.

Since BN makes a lot of investments, it’s better off to look at funds from operation (FFO) and FFO/share rather than EPS. The FFO/share is at homemade metric and is not always easy to find. Financial websites show the adjusted EPS or EPS; digging into the quarterly statements and investor presentations will give you the correct picture. For Brookfield, they showed a company that’s growing and thriving, but EPS isn’t showing that profit yet.

Find stocks with a strong dividend triangle from our Rock Stars list, updated monthly!

Example: TD Bank (TD.TO /TD)

Another example from last year was TD Bank which had lots of one-time fees in its financial statements.

Fees for TD’s decision to abort the acquisition of First Horizon, a prudent move in light of many U.S. regional banks having problems with their balance sheets, and some of them going bankrupt in 2023.
The FDIC, which ensures deposits in the US, requested a special assessment of all banks in the U.S. As TD does a lot of business there, it spent $100M for FDIC assessment, passing the stress test and proving it’s well capitalized and has a robust balance sheet
Due to the economy, all banks had to raise their provisions for credit losses.

Combining these three unrelated factors hurt the EPS, whose trend doesn’t look sharp right now.

Graph of TD's dividend triangle that shows weakening EPS but steady dividend growth — TD EPS fell, but dividend growth is still there

Yet TD kept increasing its dividend last year and will continue in 2024 why? While the one-time events hurt the business, going forward, we’ll forget all about those as the business will thrive.

What about dividend growth slowing down?

Slowing dividend growth is usually the result of the rest of the dividend triangle; it’s rare to see a company with a high single-digit to double-digit growth for revenue and earnings whose dividend growth is slowing down.

If you see a dividend increase slowing to 3% and then 1% after being at 6% over 3-4 years, chances are both revenue and earnings were slowing down before that. It is prudent management to slow dividend growth rather than bleeding a balance sheet to death just to pay shareholders, but it’s also a red flag.

Find stocks with a strong dividend triangle from our Rock Stars list, updated monthly!

Can the payout ratio help to assess dividend growth health?

Yes, definitely. When the dividend triangle is weakening and the dividend growth is slowing down, the payout ratio is probably rising. Now we’re looking at the Sell button on our dashboard. However, it’s important to look at the appropriate payout ratio. There’s the classic payout ratio based on earnings. As I said earlier, earnings are based on accounting principles, not on cash flow. You should be mindful of that.

The cash payout ratio is an interesting metric. It’s based on free cash flow, so it does not consider the company taking on more debt to finance capital expenditures. For a capital-intensive business, the cash payout ratio is not perfect either. Instead, use the funds from operation FFO payout ratio. You could also simply compare the company’s dividend per share with the amount of Distributable Cash Flow (DCF) per share to see if there is room there for future dividend growth. See The Different Payout Ratios – A Quick Tour for more details about them.

Again, context is essential. That said, a weak dividend triangle and a payout ratio getting higher starts to scare me a bit more and bring me closer to selling, but I’ll do more research.

What other metrics can help understand a weak triangle?

When I’ve established that I’m concerned about a stock’s triangle, I start by looking at the cash from operations metric, because cash is closely linked to the ability to pay a dividend.

I also look at the long-term debt trend. If the debt keeps rising, and the payout ratio is above 100%, the company is leveraging its future; it better succeed in bringing profit and cash flow to the table and later because if not, it’s literally financing its dividend.

Growing debt can be understandable when there are large projects to fuel growth; the company is financing its projects and using its cash from operations to pay dividends. However, this situation cannot be sustained for a long time. It can last for a few years, but at some point, the company must stop adding debt and pay some of it down.

What’s next?

If after looking at these two sets of metrics (the three dividend triangle metrics, and the payout ratio and debt), I feel it might be fine to keep the stock, I do more qualitative research. The goal is to understand more about what’s wrong with the business model. Is it the economy hurting the business? Competitors? Can management resolve the problem? Has management said it was addressing the problem during the earnings conference call? If they just ignore the problem, that’s another source of concern.

For how many quarters should we tolerate a downtrend?

It’s not so much about a set number of quarters, but rather the reason why the metrics are slowing down. If it’s due to an economic cycle, like a recession that causes many companies in the consumer discretionary to have even two years of bad results or poor growth. Knowing that it’s normal in a recession, I would not sell after one year. However, if it’s because the business is losing market share and not finding ways to improve over several quarters, then it would be getting close to my sell list.

Interpreting a Weak Dividend Triangle – Part 1

Do you have holdings showing a weak dividend triangle? Revenue or EPS is stagnating or falling, dividend growth is slowing down, or worse there is no dividend growth. Do you sell right away? Not so fast. First, interpret the weak dividend triangle to know what’s really happening and make the correct decision.

What’s the dividend triangle again?

The dividend triangle is a tool I’ve been working with for over ten years, successfully and it forms the basis of my investment process. The dividend triangle includes three metrics: revenue, earnings per share (EPS), and dividend.

The key to my investment strategy is to find companies that are capable of growing their revenue, either organically or by acquisition, but that constantly find ways to grow their sales. As investors, we want to invest in thriving companies. A company that found a way to grow its sales year after year is the first thing I look for.
Next on my list that, as an investor, I want to see in a company is more and more profit. Earnings per share track that. Every year, I want to see a company with more sales and higher earnings per share.
After finding this magical Unicorn—well, truthfully, many companies show strong revenue and earnings growth—the next factor I want is for the company to reward its shareholders with yearly dividend increases.

Get great stock ideas from our Rock Stars list, updated monthly!

Why these three metrics?

Since I focus mostly on dividend growers, I want to see constant and often increasing dividend growth. Good and constant revenue and EPS growth are preconditions to a growing and sustainable dividend. The combination of these three metrics often leads to companies that have positive cash flow, repetitive and predictable income, a robust balance sheet, and a business model that has plenty of growth vectors.

A company with a strong dividend triangle also comes with another bunch of great metrics. As an investor, that’s the type of business you want; a thriving business able to go through a recession without too many worries and that’ll honor its promise to increase its dividend year after year.

Learn more about the dividend triangle here.

What does a weak dividend triangle mean?

Look at Equinix’s dividend triangle. It’s easy to understand a positive dividend triangle, right? Revenue keeps growing as does the earnings per share. The dividend growth is steady and even increasing.

Three line graphs highlighting the strong dividend triangle for Equinix: trends of revenue growth, EPS growth, and dividend growth — Equinix (EQIX): a strong dividend triangle

How do we explain a weak one? What do we do when a good company’s dividend triangle is weakening? What if one metric goes down? After a bad quarter or even a few bad quarters, don’t instinctively click the Sell button. Just like our energy level and our weight, numbers fluctuate, it’s normal.

It’s all about interpreting these deteriorating numbers to see what’s happening and whether things will get better soon. As I like to say, the trend is your friend. You must look at the triangle metrics over time, 5 years is a good duration, to see whether the poor results are a hiccup or part of a downward trend over a long time.

Along with the trend, it’s important to put the results in context, i.e., understand what is going on with the company, or around the company, that is making one metric, or the entire triangle go down, or up for that matter. Monitoring your stocks every quarter will help you to quickly spot trends and put results in context.

Get great stock ideas from our Rock Stars list, updated monthly!

When revenue is going down

Whether revenue is fluctuating down or up, you can often find the context for the change in the quarterly results press release or the investors’ presentation. They usually explain the factors that affected the revenue positively and negatively. Revenue could be down for a pretty good reason in which case you shouldn’t worry too much. Here are some examples:

Currency fluctuation. Take Coca-Cola; it makes many sales outside of the U.S. and generates a lot of revenue in other currencies. Revenue reported in U.S. currency is affected by the exchange rate. A U.S. dollar getting stronger will affect its revenue downward. To see if there was revenue growth or not, it’s important to also look at the numbers on a currency-neutral basis, which is stated in the press release.
Cycle of innovation or product cycle. Look at Apple’s dividend triangle below. There’s no frenzy around iPhones, nor is the company launching many products. As a result, over the last five or six quarters, sales and earnings haven’t grown as fast as they used to. This is normal if you look at Apple’s history. It goes through product innovation cycles and occasionally there’s a pause in growth before starting another upcycle.

Three line graphs showing Apple's dividend triangle. Sales and EPS at a plateau for the last 2 years as per its innovation cycle — Apple’s sales and EPS reaching a plateau due to the company’s innovation cycle

Industry-wide cycle. We can think about basic materials and the energy sector for example. If you look at the 2015-2020 period versus 2021-2026, when we get there, we’ll have a completely different picture of the energy sector; the whole sector goes through cycles.
Sometimes it’s just the economy. Recent reports from Home Depot, Canadian Tire, and railroad companies reveal there are slowdowns. We cannot expect huge revenue or earnings per share growth for 2024, and possibly 2025. This isn’t limited to a specific company, but entire cyclical industries getting hit by consumers spending less.

Putting the revenue slowdown in context helps you to differentiate between a temporary cause, such as a cycle fluctuation or a negative currency impact, or a permanent situation. By permanent situation, I mean things that are specific to the company and not resolved by time alone, if at all. This could be a company losing market share as it cannot adapt to increased competition (think Blackberry), or a business that isn’t relevant anymore because it’s in a dying industry and fails to innovate or diversify; remember printed media and video stores?

What about falling EPS and slowing dividend growth?

Yes, the triangle isn’t just about revenue. EPS and dividends are also key metrics that can show signs of weakness. We’ll explore that in next week’s article, along with a few other metrics.

In the meantime, it’s important to understand that you must look at more than one metric to assess the state of a company’s performance, good or bad. Also, remember that putting things in context is a must and the trend is your friend!

In the Spotlight: the Utilities Sector

Electricity, gas, and water are essential in our modern world. It’s hard to imagine a house without power or running water in North America. Companies in the utilities sector offer indispensable services to their customers, and they reward their shareholders with generous dividends.

Utilities include electric, gas, water, renewable energy, diversified, or independent power producer companies. They provide the public with necessities. Since we depend on electricity and water, utility companies hold a great deal of power over the population; it would be catastrophic to see our utility bill rising by 75% overnight!

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Regulating utilities

To mitigate the risk of utilities having too much power, some countries, provinces, or states nationalized these resources to provide them at a lower price. Often, in Canada and the U.S., governments allow private companies to manage and distribute electricity, gas, and water. Granting such power to private entities couldn’t be done without strict rules. Hence, utilities usually operate in a highly regulated environment. Governments decide the price of power and water that is charged to customers.

While this seemingly puts brakes on future growth, it does provide utilities with the benefit of a stable and predictable source of income over long periods. Consequently, don’t invest in utilities to make a quick buck. On the positive side, utilities tend to grow at a steady pace, not unlike the turtle winning the race against the rabbit.

Utilities sector strengths

Historically, utilities are regarded as generous with their dividends. They’re inclined to distribute over 50% of their available cash flow to their shareholders. The perfect type of business for dividend investors.

Utility companies need large infrastructures and most of their capital projects amount to billions of dollars. This limits the number of competitors who can enter the sector. In most cases, we describe the sector as a collection of natural monopolies. It doesn’t make sense for three electricity companies to spend billions on power generators and power lines to serve the same geographic area. Therefore, utility markets are normally well protected, and companies have nothing to fear but themselves. We had a great example of that with the poor management at Algonquin (more on that later).

If you’re looking to invest in renewable energy, know that those companies are in the utilities sector. Renewable energy companies aren’t getting much love in the market of late. While wind and solar energy are getting cheaper to generate and governments offer generous subsidies, most of the “energy money” went back to the oil & gas industry. This is probably an opportune time to buy undervalued renewable stocks in this crazy market!

Utilities sector weaknesses

Be mindful of the volume of debt these companies carry. You can bet any new utility project will cost at least several hundred million, or even a few billion dollars. Most often, those projects are financed by issuing additional shares of stock or taking on more long-term debt. When interest rates rise, the cost of new financing increases, reducing the projected profitability of the project. In short, there will be less cash left to increase the dividend.

Keep in mind that some projects fail. The Atlantic Pipeline, a joint venture project between Duke Energy (DUK) and Dominion (D), was canceled recently. Result? Billions in write-offs, Dominion even reduced its dividend because of the cancellation.

With high interest rates, capital-intensive utilities face another challenge. Some income-seeking investors left the boat and went back to their first love—bonds, GICs, and preferred shares. Fixed-income products pay a better interest rate and are more stable than renewable utilities! This explains part of the general stock decline since 2021. It could be a solid opportunity, however, if you’re a patient investor.

The demand for power follows the economy. During lockdowns in 2020, we saw industrial and commercial demand for power decline. In general, recessions also have an impact for a few years. To increase the rates they charge customers, regulated utilities must get approval from regulators. During challenging times, regulators might not agree to increase the rates, preferring to give consumers a break. A good example was Arizona regulators lowering the rate increase inquiry submitted by Pinnacle West Capital (PNW) in 2021.

Looking for growth and diversification in your portfolio? Explore the industrials sector.

The Algonquin story

When Algonquin reported its earnings in November 2022, management shared plenty of bad news: negative EPS revision, uncertainty around the financing for Kentucky Power acquisition, the impact of variable rates on their business model, etc. The result was catastrophic on the market. The stock dropped 35%, from $11.51 to $7.49, in 7 days.

Algonquin's decline depicted with graphs of its share price, revenue, EPS and dividend from 2018 to 2023. — Algonquin debacle starting in 2022-23

In a conference call with investors in early 2023, Algonquin announced a 40% dividend cut and more asset sales, worth another $1B. This call revealed a company that had lost its magic touch, and whose business model—aggressive growth by acquisition—had blown up in its face. Now, AQN wants to strengthen its balance sheet which was greatly affected by variable rate increases. When the tide went down, we all discovered that management was swimming naked in the ocean.

Getting the best of this sector

Utilities became the popular kids after the 2008 financial crisis. With bottom-low interest rates, income-seeking investors ignored bonds and certificates of deposit, turning to equities that provided better yields, like utilities. This has changed and could change more with the higher interest rates.

Also, the renewable energy industry has taken some serious hits. This could be the opportunity you were waiting for. Since utilities can’t expand their business in another state or province without an acquisition, keep track of which regions have the best economic growth opportunities.

At DSR, we prefer utilities using clean energy. They’re not too expensive right now and offer great potential for the next 10 years.

We also favor companies that have been around for a while, like Fortis which shows 50 consecutive years with a dividend increase. It has proven that it can reward shareholders even during challenging times.

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Should you invest in utilities?

The utilities sector is best suited for income-seeking investors. Income investors can invest between 10% and 20% of their portfolio in utilities without any worries. For growth investors, something between 5% and 10% should be enough.

My favorites are:

U.S.: NextEra Energy (NEE), Sempra (SRE), and Xcel (XEL).
Canada: Fortis (FTS.TO / FTS), Emera (EMA.TO), Brookfield Infrastructure (BIPC.TO / BIPC), Brookfield Renewable (BEPC.TO / BEPC).

Protect your Portfolio with Consumer Staples Stocks

Want to make your portfolio more resilient to economic downturns or worse, recessions? Look to consumer staples stocks. There’s a reason for consumer staples stocks to also be called consumer defensive stocks; they defend your portfolio from the assault of market crashes.

When we describe consumer staples, we often say they are all the products you can find in your house. Products you must buy no matter what happens in your life. Companies in this sector have built stellar brand portfolios that support repeat purchases from their customers. Repetitive purchases lead to constant and predictable cash flows. Therefore, food, beverage, and household products are a great foundation for building a dividend growth portfolio.

If you are concerned about the current state of the economy, add some consumer defensive stocks to your portfolio.

Also interested in growth stocks? Explore the Consumer Discretionary sector.

Consumer staples industries

The consumer staples sector includes companies in different industries:

Beverages – Brewers
Beverages – Non-Alcoholic
Beverages – Wineries & Distilleries
Confectioners
Discount Stores
Education & Training Services
Farm Products
Food Distribution
Grocery Stores
Household & Personal Products
Packaged Foods
Tobacco

Listen to our recent webinar “All-Time-High Markets: Should You Buy?” here.

Greatest strengths

If you’re looking for a place to stash your cash during tough times, forget about your mattress. Consumer staples stocks are defensive. When the market goes into panic mode, this part of the equity markets isn’t normally a source of worry. We saw how well grocery and discount stores performed during the pandemic in 2020. They were the first to be deemed “essential businesses” along with healthcare companies.

On top of selling “essential goods” (we could discuss how alcoholic and tobacco products are considered essential, but that’s for another time), this sector also shows another great characteristic. Most industries in this sector have built their business model around repetitive sales. What’s better for a dividend investor than to find a business that keeps selling the same products to the same consumers every week? This is what we call a cash cow.

Since consumers rely on many of these products, they’ll likely cut their expenses for consumer discretionary products, such as restaurant meals, non-essential clothing, travel, and entertainment, to prioritize consumer staples products. Keep in mind that while stocks in this sector offers great protection when the market goes sideways, you must have them before market sentiment shifts downward to benefit from their protection. When the market panics, consumer staples usually trade at higher valuations, i.e., their PE ratios increase.

Throughout the years, many consumer staple companies have built iconic brands. Some companies even manage portfolios of multibillion-dollar brands. Such large brands come with economies of scale and a wide distribution network, making it very difficult for potential competitors to enter the market. This also gives investors a sentiment of calm because they can count on them paying their dividends no matter what happens. Even when people lose their jobs, they’ll probably keep buying many of these brands!

Greatest weaknesses

Lack of growth is often a matter of concern for this sector. When emerging markets came into play, they all rode the wave and discovered new playgrounds.

As those markets grew many local competitors also came on the scene. While smaller players can’t compete on price and scale, they’re more flexible and know their customers better than those “gringos” coming from North America. Buy American and buy local are not just concepts that we have here in North America. It’s a movement trending around the world.

Speaking of competition, it now comes from everywhere in the staples sector. Beverage companies go after the snacks and packaged foods industries; discount stores that first introduced limited packaged foods are transforming into full grocery stores. Such competition first led to a shelf war where products were competing against each other for top space in stores. This has moved to the online world as online shopping has reached all industries. Margins are getting squeezed and inflation has done nothing to help those industries.

Those “old” staple companies must adapt to e-commerce. They face similar challenges to consumer discretionary companies when it comes to dealing with digital sales. Even groceries must invest massively in their online platform to let consumers order their food and pick it up at the store or have it delivered.

Listen to the replay of our recent”All-Time-High Markets: Should You Buy?” here.

How to get the best of consumer staple stocks

It’s hard to identify a good time to buy consumer staples stocks because they’re rarely “on sale”. When everybody is making money in the market and growth stocks get most of the love, you have a shot at buying lesser-loved consumer staples. This is the type of investment that you almost regret having made during a bullish year because they often lag, showing minimal growth during boom times. On the other hand, when panic spreads, these companies hold the fort and ensure your portfolio doesn’t go bust.

Most consumer staple industries are investments best suited to income investors. Not for their average yield, but rather for the stability they bring to one’s portfolio.

Income investors, you can get some of these “safe stocks” for up to 10% to 20% of your portfolio. You won’t generate a maximum of dividend payments from this sector, but you’ll reduce value volatility.

For growth investors, anything between 3% to 10% would work well. Too much money invested in this sector would impact your total return potential during a bull market.

Favorite Picks

Some of my favorite picks in this sector at the time of writing are the following:

Canada stocks: Alimentation Couche-Tard (ATD.TO), Jamieson Wellness (JWEL.TO), Premium Brands Holdings (PBH.TO), Metro (MRU.TO).
U.S. stocks: Costco (COST), Procter & Gamble (PG), Coca-Cola (KO), PepsiCo (PEP), McCormick & Company (MKC), Hershey (HSY).

What to Expect for 2024

It’s hard for investors to know what to expect for 2024. Recession or a soft landing? Interest rates cut? What about bonds? And politics and wars? Here’s some insight.

Currently, a contrast exists between the resilient U.S. economy, driven by enthusiastic consumers, and a Canadian economy showing fatigue due to the strain of continuous spending. Long fixed-rate mortgage contracts in the U.S. versus the 5-year contracts in Canada contribute to this contrast.

Despite the S&P 500’s impressive double-digit growth in 2023, this surge was primarily propelled by a select few mega-cap stocks, known as the “magnificent 7,” contributing two-thirds of it.

See part of our best dividend stocks selection for 2024, download our Top Stocks booklet now!

Recession – Are We There Yet?

Predictions of a 2023 recession, including mine, were wrong. However, we saw the first signs of a slowdown in Canada in late 2023. Not calling it a recession…yet. I’m still convinced the economy will suffer from the combination of high inflation and high interest rates.

Graphs showing GDP is flattening in Canada while it is still growing in the U.S. — Flattening in Canada; still growing in the U.S.

Although a slowdown might loom in 2024, robust job markets in the U.S. and Canada, coupled with demographics where more people retire than join the workforce, might help the soft landing wished for by central banks.

Graph showing unemployment rates that have been quite low in Canada and the U.S. since early in 2022, but inching up a bit in Canada in late 2023 — Low unemployment rates in Canada and the U.S., but inching up a bit in Canada late in 2023.

Recession or not, current interest rates will significantly affect 2024.

Lower earnings

Expect weaker corporate earnings, especially in the industrials, automotive, and consumer discretionary sectors, affected by restrained consumer spending. Canadian Tire (CTC.A.TO) sold fewer discretionary items as consumers focus on essential purchases; U.S. Home Depot (HD) consumers take on smaller projects; car sales will barely go up; and so on.

Holdings in such cyclical companies are in for a few poor quarters. Should you jump ship? Short answer: no.

Zombie companies, interest rates

The number of Zombie companies, unprofitable businesses that survive by taking on new debt, went from roughly 500 to over 700 in 5 years.

Despite possible rate cuts for 2024, we won’t be going back to a cheap money era. Interest rates will stay relatively high as companies renew their debt. We’ll see zombie companies die and interest charges rise for capital-intensive businesses, including telcos, utilities, and REITs. This lagging effect will last the year and beyond. Brace for impact.

See part of our best dividend stocks selection for 2024, download our booklet now!

Market liquidity

This paints a pretty bleak future for your investments. However, there’s $6 trillion sitting in cash on the sidelines, the highest level ever seen in U.S. money market funds. If the Fed announces rate cuts, that money won’t go into bonds or in declining high-interest savings accounts; it’ll likely return to the market. Another reason to stay invested in holdings you’re confident about.

Bond rally?

The current inverted bond yield curve shows short-term bonds offering higher yields than long-term bonds, a sure sign that the market thinks interest rates will decline.

I’m not a fan of jumping from one strategy or asset allocation to another, and I’m not recommending that you do so. However, income-seeking investors might want to look to bonds. Short-term bonds tied interest rates should do well in 2024 as opposed to long-term bonds.

AI for Cost Savings?

Suffering from the slowdown, higher interest charges, inflation, what will companies do? Lower their costs to improve their margins. Using artificial intelligence (AI) is a way to enhance productivity.

A sound strategy for investors is finding companies that will profit from the AI wave, no matter what; there are even dividend payers among them!

Chip markers: Nvidia and AMD are obvious winners. Other semiconductors companies (TSM, Broadcom or Intel) could also benefit from the quantity of chips AI needs. Semiconductor equipment providers (Lam Research or ASML) could see their backlog grow.
Software enterprises: Companies could use AI to improve their software products; others, like Accenture, to boost their consulting and strategy services.
Healthcare: Healthcare companies like Abbott Laboratories, Medtronic, and McKesson already invest in AI to improve productivity.

See part of our best dividend stocks selection for 2024, download our booklet now!

Renewables & Infrastructure Investment

Relying heavily on debt to fund projects and government investment, renewable utilities have been on a rollercoaster for two years, with the wind energy industry the most affected.

Setting up wind farms is complex and costly, as is connecting them to the grid. Vast quantities of raw materials are needed, and inflation made construction costs explode. Wind energy a less performant energy solution for now when compared with the ease of installing solar panels on rooftops!

Solar energy is a cheap way to generate electricity. Like wind, it’s an intermittent energy source but more predictable.

The solution for reducing carbon emissions is a combination of hydro electricity, wind & solar energy, natural gas, and potentially nuclear energy. Governments will spend billions in renewable projects, leading to major infrastructure spending. My favorites are Brookfield (Renewable and Infrastructure), NextEra Energy (the parent company) and Xcel (regulated/green energy mix). But utilities aren’t the only ones to benefit from this wave of money…

Alternative asset managers

Infrastructure projects don’t generate cash flow immediately, far from it. To invest and manage them, you need specialists called alternative asset managers.

Investing in alternative asset managers is a great way to diversify your portfolio. Usually, their returns aren’t determined by what’s happening on the market, and they can be about 5-7% above inflation over long periods. My favorites? Brookfield (BN or BAM) and Blackstone (BX).

Short-Term vs. Long-Term

The short-term view of the market might be cloudy, but long-term looks much brighter:

Staying on the sidelines after the tech bubble crash, 9/11, the financial crisis, the European debt crisis, Brexit, or COVID-19 would have meant missing 20 magical years on the market! Conclusions:

Staying invested is the best solution, always.
The market might not give you much for several years. Be patient and focus on your growing dividends.

2024 Playbook

Don’t overhaul your investing strategy and start over. Adjust your portfolio to ensure you are well-invested and poised for what’s coming. A potential long bear market affects investors who are invested and those with cash on the side. Here’s the playbook.

Invested investors

Review your portfolio; ensure it’s well-diversified across several sectors
Identify weaker looking stocks; re-examine if you still want to hold them
Trim overweight positions
Optimize your holdings with better stocks (strong metrics, growth potential)
Build a cash reserve if you’re retired and depend on your portfolio to generate income

Cash on the side investors

You could wait for years and never get today’s price again. Instead:

Build a list of stocks to buy now
Invest 33% of your money now
Wait for a quarter, review earnings, invest another 33%.
Rinse & repeat for another quarter to fully invest your money.

The goal is to make sure your portfolio thrives no matter what happens on the market:

You invest 33% just days before a crash starts. Major market crashes are intense, but the down trend doesn’t last very long. Therefore, three and six months down the line, you’ll have bought during the dip, averaging down with cheaper prices.
Alternatively, you invest 33% just the market begins a 5-year bull run. You’ll slowly build a profit cushion with an average price below the market.

Wars & political tensions

Ongoing geopolitical tensions and conflicts make headlines, scare the market, and cause tragedies, but their long-term impact on investments is limited. Think about how fast natural gas prices returned to pre-war levels while the Russia-Ukraine war still rages. Companies carry on and adapt quickly to new circumstances.

Quality income investments

Don’t just go exclusively for yield. It’s okay to have higher yield-stocks, but find companies that won’t let you down and that keep increasing their generous dividends. To safeguard your portfolio, focus on dividend safety.

Reduce your exposure to stocks you’re not 100% convinced about to prevent a huge hole in your portfolio if they crash.

Final Thoughts

As always, navigating the uncertainties of 2024 requires that you remain loyal to a straightforward strategy, echoed by Peter Lynch: know what you own and why you own it.