The year just ended was a bad one for the market and income stocks did not escape the downturn. Although almost all retained their regular dividends/distributions, many saw their market prices slip. Rising rates were a major contributor to this, negatively affecting interest-sensitive stocks.
I have always advised income investors to ignore share price movements and focus on what is truly important to them: cash flow. But I understand that seeing the total value of your portfolio decline can be unsettling, even if the income keeps coming.
But not all income stocks lost market value in the past 12 months. Some of the recommendations in my Income Investor newsletter posted decent gains, including some in the double-digit range. If you held any of these in your portfolio, you may have come out of the year with an overall capital gain.
Here is a close look at the top three stock winners over the period from Jan. 29, 2018, to the close of trading on Friday, Jan. 25, 2019. For comparison, the S&P/TSX Composite Index was down 4.5 per cent over the same time frame.
Capital Power Corp. (TSX: CPX)
This stock had a gain of 24.1 per cent over the year. Based in Edmonton, the company describes itself as “a growth-oriented North American power producer [that] develops, acquires, owns and operates power generation facilities using a variety of energy sources.” It owns approximately 5,100 megawatts of power generation capacity at 25 facilities in Canada and the United States.
The increase in the company’s share price was sparked by several factors, including an active acquisition program, an aggressive share buyback plan, a midyear dividend increase of 7 per cent and solid third-quarter financial results.
The most recent acquisition was the purchase of Arlington Valley LLC, which owns a 580-megawatt natural gas generation facility in the U.S. southwest. The company says the deal will be immediately accretive to its adjusted funds from operations, which is expected to have an overall increase of 21 per cent this year.
The quarterly dividend is now $0.448 per share ($1.792 annually) to yield 6.2 per cent at the recent price of $29.04. The stock was first recommended in January, 2014 at $22.60.
Morneau Shepell Inc. (TSX: MSI)
Morneau Shepell is the largest administrator of retirement and benefits plans in Canada. It is a leader in strategic human resources consulting and pension design.
Established in 1966, the company serves about 24,000 clients, ranging from small businesses to some of the largest corporations and associations. It has more than 4,500 employees in offices across North America, the United Kingdom and Australia.
Over the past year, the share price moved to $26.88 from $22.66, a gain of 18.6 per cent. The stock was first recommended in July, 2011 at $10.24.
The main reason for the continued strength in the share price is the company’s consistently strong financial results. Third-quarter numbers showed a revenue increase of 19.9 per cent to $182.8-million. Adjusted EBIDTA increased 20 per cent, to $34-million. Costs of $22.3-million relating to the acquisition of LifeWorks Corp. pushed net income for the quarter into the red, but the deal is expected to produce synergies of $10-million this year and $15-million in 2020 and beyond. In 2017, LifeWorks generated revenue of $105-million. It operates in the United States, Canada, the U.K. and Australia.
The main knock against MSI is the fact it has not increased its dividend of $0.065 per month since it moved to the current level in January, 2011. That’s a long time and, as a result of the increase in the share price, the yield is down to 2.9 per cent. The reason is obvious – the company prefers to invest in the business through acquisitions such as LifeWorks rather than pay more money to shareholders. But as long as its price keeps rising, management probably won’t hear many complaints. Total capital gain since the first recommendation is 162.5 per cent.
CN Rail (TSX: CNR, NYSE: CNI)
When we originally recommended CN back in October, 2005 at $21.09, we wrote that the stock did not pay a large dividend but that the company had a history of annual increases. Combined with the capital gains potential, we felt the shares would be a good fit for income investors.
That’s how it has turned out. The company continues to hike its payout each year – it’s now up to $0.455 per quarter ($1.82 per year) with another increase expected to be announced soon. Based on the recent share price of $110.37 the current yield is just 1.6 per cent, but those who have been in since we first advised buying enjoy an 8.6-per-cent annual payout on their investment.
As for capital gains, the stock is up 423 per cent since we first advised buying. Over the past 12 months it is ahead 12.6 per cent.
Third-quarter revenue increased by 14 per cent to $3.7-billion. Adjusted net income was up 11 per cent to $1.1-billion. On a per-share basis, fully diluted, CN earned $1.50, a 15-per-cent improvement over the same period in 2017.
For a mature company, those are very impressive numbers.
Some of our other recommended companies that have posted nice gains in the last year include:
Fortis Inc. (TSX, NYSE: FTS): +9.0 per cent
Pason Systems Inc. (TSX: PSI): +7.9 per cent
Algonquin Power and Utilities (TSX, NYSE: AQN): +7.8 per cent
Pembina Pipeline (TSX: PPL, NYSE: PBA): +5.8 per cent
Medical Facilities Corp. (TSX: DR): +5.4 per cent
Northwest Company (TSX: NWC): +5.3 per cent
Disclosure: I own shares of Morneau Shepell, Fortis, Algonquin Power and Pembina.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.