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Investment Ideas Worrying signs from credit markets, a promising bank stock, and a 'safe' dividend at 6.8%

The "reach for yield" has pushed up prices of fixed income investments.

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Aging populations in North America, Western Europe, Japan and China have made 'reaching for yield' the most pervasive investment trend in the past decade. The problem with long-term market trends is that eventually demand – in this case retiree's demand for stable income – exceeds supply, assets get expensive and portfolio risks increase to prohibitive levels.

There are signs that in fixed income and broader credit markets, markets are approaching a danger zone. In an otherwise bullish report, Credit Suisse analyst James Sweeney noted that "our credit risk index has moved in to euphoria and a further surge in [global economic] growth would … make a full-fledged global risk appetite euphoria much more likely."

Ray Dalio, founder of Bridgewater Associates and arguably the world's most prominent hedge fund manager, recently warned of 'significant risk' in global bond markets as central banks tighten monetary policy and withdraw monetary stimulus, "Tightenings become progressively more concerning because as you move along they're more and more difficult to get perfect," Dalio said. "As we're progressing, we're entering a period of greater risk in the nature of the market."

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A resurgence in collateralized debt obligations (CDOs) – the packages of mortgages and other debt that became the villains of the financial crisis – is a clear sign that demand for income has outstripped the market's ability to provide it in conventional, lower-risk form. Citi analyst Aritra Banerjee wrote, "Investors may not have necessarily wanted to add leverage, but, simply put, they have had to, given the lack of alternatives."

Domestically, corporate junk debt issuance is running at record levels and south of the border, Businessweek cautions that the hunger for corporate dent "ignores corporate warning flags."

These are all reasons to be concerned about returns in credit markets but thankfully there are no signs of imminent disaster. Nonetheless, investors should reassess the risks in their fixed income and credit portfolios to avoid getting caught as portfolio risks rise.

-- Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

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Canadian Western Bank. All Canadian bank stocks are moving up, but Canadian Western Bank stands out: Its share price is surging, and its spectacular gains in recent months offer another example of why underperforming bank stocks can make ideal investments. Consider these numbers: Since May, when Canada's banking sector was in the doldrums, the S&P/TSX composite commercial banks index has rebounded 13 per cent as investors applauded stronger economic growth, two Bank of Canada rate hikes and easing concerns about the country's housing market. But Canadian Western Bank has bounced 44 per cent over the same period, three times the gain of the banks index and more than double the gain for the best-performing of the Big Five, Bank of Nova Scotia. David Berman explains.

Capital Power Corp.

John Heinzl likes dividend increases. He  likes them even more when a company vows to increase its dividend for several years into the future. Case in point: Capital Power Corp. In July, the independent power producer not only raised its dividend by 7.1 per cent – its fourth consecutive annual increase – but extended its 7-per-cent annual dividend growth guidance by two years, to the end of 2020. The projected hikes still require board approval, mind you, but Edmonton-based Capital Power probably wouldn't be making such promises unless it was confident it could deliver. Read Yield Hog to find out more.

Stelco Holdings Inc. It surged Friday as the 107-year-old Canadian steelmaker returned to public markets Friday following two trips through bankruptcy court. The steelmaker raised $200-million in its initial public offering after pricing its shares at $17 apiece, the midpoint of its disclosed range. Scott Deveau from Bloomberg News reports.

Apple Inc. Apple Inc. briefly became the U.S.'s first $900-billion company on the day its stores around the world were inundated with customers trying to get their hands on the new iPhone X. Demand for the handset, which boasts a facial recognition system, an edge-to-edge display, and a price tag starting at $999, has prompted Apple to predict record sales of at least $8- billion in the Christmas quarter. At one point in trading Friday, the shares gained as much as 3.7 per cent to $174.26, briefly tipping Apple's market capitalization above $900-billion. Alex Webb from Bloomberg News reports.


The Rundown
 

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What TD Asset Management's CEO is predicting for stocks, the loonie and investment returns

Jennifer Dowty recently interviewed Bruce Cooper of TD Asset Management, the CEO and CIO discussed his outlook for equity markets, the dollar, and monetary policy. Read excerpts from the conversation here.

A remarkable chart that points to a possible end to the TSX bank rally

What happens to a TSX market rally driven by short covering in bank stocks when the short covering stops? We might be about to find out. In a recent report, Canaccord Genuity portfolio strategist Martin Roberge argued that the recent rally in the S&P/TSX composite was mainly the result of short covering in the financial sector. Mr. Roberge warned that if market leadership doesn't broaden, with more stocks outside of the financial sector pushing the benchmark higher, the rally could stall. Scott Barlow explains.

The contrarian view on dividend-paying stocks

Investors tend to view companies that pay dividends as boring, but reliable, stewards of shareholder capital, but there are a variety of reasons why these payouts aren't necessarily the best sign of a strong company. John Reese examines a few stocks that offer both value and also pay dividends.

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Nervous about frothy stocks? Here are four alternatives

Persistently strong stock prices are as much a threat to smart investing as falling markets. You can see this in the rising number of questions Rob Carrick is getting from investors who are nervous about buying into the stock market right now and are looking at alternatives. He explains four potential options.

There's one big thing holding back the marijuana ETF

What's in your marijuana ETF? Some fentanyl, it turns out. Insys Therapeutics Inc. is a holding of the Horizons Marijuana Life Sciences Index ETF, better known as the world's first pot ETF. Trading in the Arizona-based pharmaceutical company was halted Thursday after its founder was arrested on charges he took part in a scheme to bribe doctors to overprescribe a fentanyl-based pain medication. Trading resumed Tuesday, but the stock has plummeted about 30 per cent since last Wednesday's close, compounding losses from its 2017 peak. Those losses have been a drag on the marijuana fund's returns. But the situation also highlights a notable risk for the ETF: American firms. Matt Lundy reports.

Meet the robo-planner: Money answers with no push to buy investments

Two of the most important financial questions of our time are: Can I afford to buy a house, and do I have enough money to retire? Rona Birenbaum and Seyon Vasantharajan are offering answers to these questions through their new robo-planning firm, Viviplan. For $450, you can get an online financial report that address two major financial decisions of your choosing. For $500, you get an additional 30-minute walk-through with an accredited financial planner. For $800, you get a full financial plan covering budgeting, estate planning, asset allocation and insurance. The Canadian market currently has a strong contingent of robo-advisers, which use an online interface to build and manage investment portfolios at a low cost. The robo-planner is a new and complementary development that doesn't touch investments, choosing instead to focus on planning issues such as affording a house and retirement readiness. Rob Carrick explains.

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Know when to trim your stock-market winners

If making a profit by buying stocks boils down to gut instinct, making a profit by selling them is an art. If you had the gut instinct to buy a diversified basket of stocks in the depths of the 2009 global financial meltdown, your portfolio has more than tripled in value. But with equity markets topping new highs, those profits have retail and institutional investors alike wondering whether it's time to cash in. Dale Jackson reports.

Six ways investors can play a recovering energy sector

Three ETF experts give their top picks for investors interested it being part of the oil sector's recovery. Shirley Won reports.

This dividend fund steers clear of Canadian bank stocks

Stephen Groff, a portfolio manager with Cambridge Global Asset Management, a unit of CI Investments Inc., doesn't own Canadian banks in his domestic dividend mutual fund. It's an unusual call given that banks are index heavyweights, but it hasn't hurt his Cambridge Canadian Dividend Fund. It won a Lipper Fund Award in 2016 for generating strong returns over three years with lower risk than its peers. Shirley Won reports.

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Dividend funds for investors who are banked to the max

Canada's banks are dividend machines, so it makes sense that dividend funds and ETFs are loaded with them. But if you've got a lot of bank exposure elsewhere in your portfolio, your dividend fund could put you at risk of bank overload. You don't want potential trouble in one sector to infect everything in your portfolio. Yet this could happen if you owned a broad-based equity mutual fund or exchange-trade fund, and had holdings in preferred shares and corporate bonds. Banks dominate all these categories. Rob Carrick takes a look at four funds with less bank exposure.


Others

The week's most oversold and overbought stocks on the TSX

Friday's Insider Report: Companies insiders are buying and selling

Thursday's Insider Report: Companies insiders are buying and selling

Wednesday's Insider Report: Companies insiders are buying and selling

Thinking of selling a stock? Five things to consider

Research report: What to expect from REITs when rates rise

Research report: What's next for marijuana stocks in Canada

Why the markets are likely to embrace Jerome Powell as Fed chair: Mohamed A. El-Erian

The Canadian penny stock and the arcane metal behind a mega mining deal

Research report: TSX earnings scorecard: How third-quarter results have fared so far

Number Crunchers

Six Japanese dividend stocks poised for growth

Eighteen Canadian dividend payers with strong cash flow

Eighteen large-cap companies that have enjoyed high growth

Ask Globe Investor

Question: My job is being abolished I will be getting severance pay in November. Would there be any advantage to me to roll the severance (I need the money to pay debt) into an RRSP (registered retirement savings plan) and then in January cash in the RRSP as my income will be much lower next year?

Answer: From what little you've told me, yes it is good thinking since you'll get the severance at the near end of the year. That being said only take out the absolute minimum that you need in January. Hopefully you will get new employment in the year and have other income. Only withdraw what you need to cover the debt. Hopefully you will get a new job or your unemployment insurance will cover your living expenses.

--Nancy Woods

Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.


What's up in the days ahead

What's next in the world of mutual funds? It could just be liquid alternatives. Clare O'Hara will tell us all about in Saturday's Globe Investor. Also, John Heinzl will share his wisdom on this week's selloff in Enbridge stock.

Click here to see the Globe Investor earnings and economic news calendar.

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Compiled by Gillian Livingston

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