John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
You mean dividend stocks can actually – gulp – go down?
In the four days following Donald Trump's unexpected election victory, shares of many classic dividend payers – including utilities, pipelines and telecoms – didn't just go down. They got clobbered in a sell-off that some say was long overdue.
My Strategy Lab model dividend portfolio has the bruises to prove it. Among the hardest-hit stocks were Fortis Inc., down 7.6 per cent, Enbridge Inc., off 5.1 per cent, and BCE Inc., which skidded 4.4 per cent.
For dividend investors who have gotten used to watching their stocks go only one way – up – the reversal has served as a wake-up call that even the strongest, most reliable businesses are vulnerable to the changing political and economic winds.
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The main reason cited for the sell-off is that president-elect Trump's vow to boost infrastructure spending is stoking worries about inflation, which in turn is driving up government bond yields. The yield on Canada's 10-year government bond, for example, has surged to more than 1.5 per cent from about 1.2 per cent before the election – a hefty jump for such a short time period. When bond yields rise, the yields on dividend stocks usually climb as well, which means dividend stock prices must fall.
So, is it time to get off the dividend train? Not at all. Every asset class hits a rough patch occasionally, and dividend stocks are no different. They've posted such strong gains in recent years that they were ripe for a pullback – regardless of who won the White House.
Analysts see nothing alarming in the recent sell-off and recommend that dividend investors stay the course.
"Utilities, REITs [real estate investment trusts], pipelines – you name it – if it's stable and pays a dividend it has performed exceptionally well," said Murray Leith, executive vice-president and director of investment research with Odlum Brown in Vancouver. "A lot of the valuations were on the higher side of reasonable."
Mr. Leith and other analysts and portfolio managers I spoke to don't expect the sell-off in dividend stocks to turn into a prolonged rout. Indeed, many dividend stocks rebounded sharply on Tuesday – an indication that some investors believed the selling was already overdone.
One reason to remain optimistic about dividend stocks is that, while government bond yields might continue to rise modestly, they will likely remain at historically low levels for years.
"There is too much debt in the world and debt is deflationary," Mr. Leith said. He's skeptical that infrastructure spending and tax cuts will be sufficient to get the U.S. economy growing at a rapid enough pace to spur inflation and cause interest rates to rise significantly.
The pullback in dividend stocks may prove to be temporary, others predicted.
"It's a knee-jerk," said Renato Anzovino, vice-president and portfolio manager with Heward Investment Management in Montreal. "We still see slow growth ahead. We don't see a recession, but we don't see U.S. GDP [gross domestic product] growing at 4 per cent because of what Trump is going to do."
Mr. Anzovino, who manages the Heward Canadian Dividend Growth Fund, is using the sell-off to shop for attractively priced stocks. He recently purchased shares of pipeline and power company TransCanada Corp., and he's watching a few other beaten-up dividend companies including Algonquin Power & Utilities Corp., Emera Inc. and First Capital Realty Inc.
"Some high-quality companies have gotten hit more than they should have. There might be some more downward pressure so we have cash and we're looking at some opportunities," he said.
Not all dividend stocks have been caught in the downdraft. Insurance companies, for instance, stand to benefit from rising interest rates because they would be able to earn higher returns on the premiums they invest in fixed-income securities. Shares of Manulife Financial Corp. and Sun Life Financial Inc. both have risen sharply since the U.S. election, with better-than-expected quarterly results giving the shares an added boost.
Canadian bank stocks have also rallied on expectations that rising rates will lead to better loan margins and on hopes that deregulation will benefit the U.S. operations of Canadian banks.
Tony Demarin, president of BCV Asset Management in Winnipeg, said he sold a few dividend stocks – including Fortis, Emera and BCE – in the months leading up to the election because the valuations were getting stretched. But he'd consider buying them back if prices continue to fall.
For retail investors who don't have a team of money managers at their disposal, buying and holding high-quality stocks that raise their dividends regularly is still the best approach to building wealth, Mr. Demarin said.
"Continue to collect those dividends and reinvest those dividends," he said. "If you're a longer-term investor, this is just a short-term setback."
Disclosure: The author personally owns shares of Fortis, Enbridge, BCE, TransCanada, Algonquin, Emera and Manulife. He holds Fortis, Enbridge, BCE and TransCanada in his Strategy Lab model dividend portfolio.