Portfolio Strategies

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.

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!

Don’t miss anything! Subscribe to our newsletter here.

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.

Like what you read? Don’t miss anything. Subscribe to our newsletter here.

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).

Unlock the Power of Dividend Reinvestment Plans (DRIPs)

If you’re looking for ways to maximize returns and build long-term wealth, consider dividend reinvestment plans (DRIPs). Reinvest your dividends in the underlying stock automatically, compounding your investment over time.

In this article, we’ll delve into what DRIPs are, how they work, how investors can participate, and the advantages and inconveniences associated with them.

What are DRIPs?

Dividend reinvestment plans (DRIPs) are an investment tool that allows shareholders to reinvest cash dividends received from a company’s stock into more shares or fractions of shares. Instead of receiving dividends in the form of cash payouts, investors automatically reinvest those dividends into the same stock. The result? Investors accumulate more shares over time, without any effort, and save themselves transaction costs along the way.

How Do DRIPs Work?

When a company pays dividends, instead of receiving a cash payment, shareholders who participate in a DRIP program receive shares equivalent to the value of the dividends. These shares are bought directly from the company without brokerage fees. Sometimes, DRIP participants get the stock at a discounted price.

For example, suppose you own 100 shares of Company X, and each share pays a quarterly dividend of $1. The stock price is $25 per share. If you take part in Company X’s DRIP program, instead of receiving $100 in cash dividends, you will receive 4 shares. Over time, this reinvestment can significantly increase your holdings in Company X.

Don’t miss anything! Subscribe to our free newsletter here!

Enrollment and Participation

Participating in a DRIP program is relatively straightforward. Usually, investors must own at least one share of the company’s stock to enroll in the plan. They can do so directly through the company’s transfer agent or brokerage firm, depending on the availability of the DRIP program. Once enrolled, dividends are automatically reinvested without requiring any further action from the investor.

Many brokerage firms offer DRIP services to their clients, making it convenient for investors to enroll in multiple DRIP programs through a single platform. Investors can usually manage their DRIP participation online, track their dividend reinvestments, and monitor their growing investment portfolios.

Note that not all companies offer DRIPs. Consult the Investor Relations section of a company’s website to see whether they have a DRIP. Brokerage firms will also have a list of company DRIPs you can enroll in.

Advantages of DRIPs

Compounding Returns

One of the main benefits of DRIPs is the power of compounding returns. By reinvesting dividends back into the underlying stock, investors buy more shares, which in turn generate more dividends. Over time, this compounding effect can significantly enhance the total return on investment.

Dollar-Cost Averaging

DRIPs provide investors with the advantage of dollar-cost averaging. Since dividends are reinvested regularly, regardless of market conditions, investors buy more shares when prices are low and fewer shares when prices are high. This disciplined approach helps smooth out the impact of market volatility and can result in a lower average cost per share over time.

Convenience

DRIPs automate the process of reinvesting dividends, eliminating the need for investors to actively manage their dividend income. This automation makes it convenient for investors to grow their investment portfolios without requiring constant attention or manual intervention.

Potential Cost Savings

Many DRIP programs offer the option to buy additional shares at a discounted price or without incurring brokerage fees. This can lead to cost savings for investors, especially those who regularly reinvest dividends and accumulate shares over the long term.

Don’t miss anything! Subscribe to our free newsletter here!

Drawbacks of DRIPs

While DRIPs offer several advantages, they can complicate tax reporting for investors. In non-registered accounts, reinvested dividends are still considered taxable income, even though they are not received in cash. Investors need to keep track of their reinvested dividends and report them accurately on their tax returns, which may require more record-keeping and tax preparation efforts.

Participating in a DRIP program means relinquishing control over dividend payments. While automatic reinvestment can be helpful for long-term investors, it may not suit those who prefer to receive cash dividends for other purposes, such as funding living expenses or investing in other stocks.

In some cases, companies issue new shares to fulfill the demand for DRIP participants, which dilutes existing shareholders’ ownership stakes. The effect of dilution might be minimal for large, established companies, but it could be more significant for smaller companies with fewer outstanding shares.

To DRIP or not to DRIP

Participating in a DRIP increases investors’ positions in some stocks automatically without them having to lift a finger. Over time, you could end up with overweight positions for these stocks if you don’t monitor your portfolio.

Also, if the stock price is on a major bull run and keeps rising, and your DRIP buys more for you with every dividend payment, your average cost per share rises as well. The point is that investors should watch their DRIP reinvestments, and the weight of the positions quarterly to avoid these issues. When a position reaches the maximum weighting wanted, it’s time to stop the DRIP to either cash in the dividends or invest them in other stocks.

Investors getting near retirement should also remember to review their DRIPs and stop some or all of them to help build up their cash reserve with the cash dividends ahead of the start of their retirement. Find out more about this in Retirement Cash Reserve: Surf the Market’s Waves.

Conclusion

Dividend reinvestment plans (DRIPs) are a compelling tool for investors to grow their investment portfolios over the long term. By reinvesting dividends back into the underlying stock, investors can harness the power of compounding returns and dollar-cost averaging to maximize their wealth accumulation.

While DRIPs provide numerous advantages, including automation, cost savings, and compounding benefits, investors should also be mindful of the potential tax implications, lack of flexibility, and the risk of dilution associated with taking part in DRIP programs. Investors must also monitor the weight of positions for which they participate in a DRIP and stop the DRIP when the positions are large enough and when they want to build their retirement cash reserve.

Ultimately, the decision to enroll in a DRIP should align with investors’ long-term financial goals, risk tolerance, and investment preferences.

Canadian Stocks Paying USD Dividend or Trading on US Market

Canadian stocks paying USD dividends or trading on an U.S. market (either the NYSE or NASDAQ), or both. Why? Canadian dividend stocks are fascinating. Many of them operate in small niches and pay handsome dividends.

Should you invest in a Canadian stock on the U.S. market? What is the advantage of having a dividend paid in USD by a Canadian company? Are there withholding taxes on USD dividends?

Let’s answer these questions. We’ll also cover Canadian companies paying a dividend in USD for my fellow Canadians who want to enjoy a sunny retirement down south without worrying about currency fluctuations.

Create income for life. Download our guide!

That darned exchange rate

One question that keeps coming up since the creation of Dividend Stocks Rock in 2013 is:

“As a Canadian, should I invest in the U.S. stock market?”

This is usually followed by…

“I’m asking because the currency rate isn’t good right now”

Is it really? Let’s look at the Canadian Dollar vs. the US dollar since the 70’s:

What we see is that we used to trade close to par in the 70’s (remember, it wasn’t a glorious decade for our southern neighbors). Then, it’s a rollercoaster ride between $0.65 to $1.05 depending on the decade. Now, let me work some magic with this graph and present another perspective:

Over the past 50 years, the dollar moved by 26%. In annualized return, we’re talking about the equivalent of an “expensive” ETF fee (0.456). The largest movement was from 2002 to 2007 (remember the oil boom with oil income trusts?) where our dollar surged by 71%. The difference between the bottom in 2002 and today is a 16% upside fluctuation.

Here’s the range of risk regarding CAD vs USD: over a short period of time, one investment in “bad” currency could make you lose a lot (71% between 2002 and 2007). However, if your investment horizon is over five years (seriously, if you’ll need your capital in 5 years or less, stop investing in equities right now), chances are the impact of currency fluctuations will be less than 1% per year.

Right now, we are not close to a historical high or a historical low. Therefore, your risk of losing massively in investing in USD for Canadians or in CAD for Americans isn’t that important all things considered.

Cross-border investing: is it worth it?

However, the risk of not investing in those unique opportunities for each country is great. Americans, you won’t find better banks, telcos, pipelines and utilities outside of Canada. Canadians, you won’t find better exposure to international markets, new technology and the world’s most popular brands outside of the U.S.

If you can combine both markets to your advantage, you’ll build the most powerful and stable dividend growth portfolio. You’ll be well on your way to achieving your retirement dreams.

I’ve discussed at length my interest in U.S. dividend growers. I’m pretty sure I’ve convinced most of my fellow Canadians to consider U.S. exposure in their portfolios. However, I haven’t fully covered the advantage for Americans to invest in Canadian Stocks.

Since we are talking about currencies, let’s look at these topics:

Canadian dividend stocks trading on U.S. markets for Americans to benefit from our best sectors.
Canadian dividend stocks paying dividends in USD for Canadians to retire in Florida or Arizona.

Learn about how Canadians can obtain a currency hedge and buy US stocks at a lower price, by reading Canadian Depositary Receipts (CDRs).

Create income for life. Download our guide!

Canadian Dividend Stocks trading on the NYSE

Good news, the list of Canadian dividend stocks trading on U.S. markets isn’t exhaustive. I’ve compiled a complete list to the best of my knowledge.

You can download the list here.

Fortunately for you, there are several great options on this short list.

Canadian banks

(RY, TD, BMO, CM, BNS): Canadian banks are highly regulated, but also highly protected. They are comfortably doing business in a small oligopoly. If you haven’t considered Canadian banks yet, now’s your chance. The big 5 are trading at 9.5-11.5 times their earnings. RY and TD are my favorite from this group (more on National Bank later). A special mention to Brookfield Assets Management (BAM) which is an asset manager, not a bank. Still, it’s a company you should consider. You can view our complete Canadian banks ranking.

Life insurance companies

(MFC, SLF): Canadian Life Insurance companies could be interesting now that interest rates appear to be increasing. My favorite is Great-West Lifeco, but sadly it’s not part of this list. SLF would be my pick instead.

Telecoms

(BCE, TU, RCI, ): Like Canadian banks, telecoms operate in a small oligopoly where 90% of the wireless market is controlled by BCE, TU and RCI. BCE and TU are long-time dividend growers. The former will offer you a stable yield while the latter will offer you a great combination of growth and yield.

Utilities

(FTS, BEP, BIP, TA): If you look them up at DSR you will notice they all have strong ratings, but TA. BEP and BIP also pay their dividends in USD. Therefore, there is no reason to not consider those great dividend growers!

Energy

(ENB, CNQ, TRP, SU, IMO, PBA, CPG, ERF, OVV): While there is a wide range of choices in this category, I would cut the selection to only include dividend growers. ENB and TRP are probably the most reliable pipelines in North America while CNQ and IMO (which is partially owned by XOM) are two other great dividend growers. They have proven (especially in 2020), that they can weather any storms and keep their promises to shareholders.

Industrials

(TFII, CNI, CP, STN, WCN, TRI): This is clearly a widely diversified group, but all of them merit a look nonetheless. CNI and CP are among the strongest railroad companies in North America. WCN pays a small yield and is a very stable business. Thomson Reuters shows 28 years of consecutive dividend increases. TFI International is one of the fastest growing trucking companies in North America.

Materials

(FNV, NTR, GOLD, AEM, WPM, PAAS, MEOH, TECK, CCJ): You know I’m not a big fan of materials, but FNV is in another class. This is a rare gold-related company showing several years with dividend increases. NTR is also an interesting pick if the demand for potash remains strong.

Others

(MGA and OTEX): Magna International (MGA) is an amazing company. You can surf on the car industry along with the EV trend through Magna without having to take the risk of another automotive crash. The company is one of the largest auto parts sellers in the world. It’s a cash flow machine! As for Open Text, this is a SAAS business with over 100,000 customers around the world. However, I must admit that you have better choices on the US market if you are looking for a solid tech stock!

If you are American, I’d say that investing in Canadian banks, telecoms and utilities would add a lot of value to your portfolio. We have many choices in the energy & materials sectors as well, but I’m not a fan of those sectors.

What about pink sheets?

Pink sheets are listings for stocks that trade over the counter (OTC) rather than on a major U.S. stock exchange. They’re usually companies that can’t meet the requirements for listing on the major markets. They often have a “bad reputation” as many of them are penny stocks with limited liquidity. As a dividend investor, this isn’t exactly what you want to add to your portfolio.

However, you will also find amazing Canadian stocks are listed as pink sheets, such as National Bank (NTIOF), Emera (EMRAF), Power Corporation (PWCDF) and Alimentation Couche-Tard (ANCTF). Those are far from being penny stocks. Emera is the smallest company among this list with a market cap over $15B. While there is less volume for those companies, you can add them to your portfolio if you have a long-term horizon. If you’re a DSR member, I invite you to read our analyses of these stocks on the Canadian side if you have doubt about a pink sheet stock.

Create income for life. Download our guide!

Canadian Dividend Stocks Paying USD dividends

Some Canadian companies pay their dividend in USD. They choose to this usually after a business analysis shows most of the company’s revenues are made in the United States. By paying their dividend in the same currency as they generate their revenues, they reduce the risk of currency fluctuation. An example is TFI International (TFII) that changed its CAD dividend to USD after the integration of a massive acquisition in the U.S. (UPS freight was purchased for $800M in 2021).

Is there a tax implication?

In most cases, dividends paid in U.S. dollars by Canadian companies are eligible for the dividend tax credit (source). It’s always a good practice to verify this in the dividend section of the company’s investors’ website. The dividend may also be deposited in your account automatically in CAD. Again, it depends on the company. Those are questions you can ask your broker to ensure you receive the right dividend in the right currency!

Advantage of Canadian stocks paying USD dividends

In general, the advantage of Canadian stocks paying a USD dividend is more for the company, because it generates most of its revenues in USD as explained earlier. For investors, it could be a source of headaches or frustrations (you don’t want your broker making a sweet 2% conversion rate fee on your dividend, right?). However, if you plan a vacation or retirement in the U.S., having Canadian stocks paying their dividend in Uncle Sam’s dollar is a natural hedge against currency fluctuation. You can build a part of your portfolio with those Canadian stocks along with other US stocks and you’ll be set to never have to worry about converting your money “at a bad rate” in the future.

The list of Canadian stocks trading on the NYSE counts 75 companies and the Canadian stocks paying USD dividends is relatively small (35 companies), but you will find some common names.

You can download the list here.

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.