Rising interest rates are generally bad news for dividend-paying stocks. As returns on safe government bonds rise, investors tend to shift more money into fixed-income assets, depressing the price of interest-sensitive securities.
Of course, this is nothing new. I have dealt with the implications of rising rates on several occasions. Everyone should know what to expect.
However, it is worth noting that some of the recommendations in my Income Investor newsletter have resisted the downward pressures and have held up quite well so far this year, albeit for a variety of reasons. Here are some of them.
Morneau Sheppell Inc. (MSI-T). The shares of this human-resources consulting company have been moving steadily higher for several months and are currently trading near their all-time high. The company reported solid financial results for 2017, with an increase of 6.6 per cent in revenue, to $631.2-million, and a profit gain of 33 per cent, to $34.6-million. Free cash flow increased by $1.4-million, to $72.3-million. The only negative was that the dividend is unchanged at 6.5 cents a month (78 cents a year). The increase in the share price means the yield is down to 3.1 per cent.
Premium Brands Holdings Corp. (PBH-T). This food-services company keeps rocketing higher. At the start of this year, the shares were trading in the $100 range. Earlier this month they topped $120, and they don’t seem to be slowing down. The company posted a record year in 2017 with revenue of $2.2-billion and earnings of $80.5-million or $2.70 a share, compared with $68.8-million or $2.39 in 2016. It passed some of those gains on to shareholders by increasing the quarterly dividend by 13.1 per cent, to 47.5 cents a share ($1.90 annually) from 42 cents ($1.68 annually). The company’s deal to provide sandwiches to Starbucks is one of the main drivers of this success story, but the firm also continues to grow by acquisition with four new transactions recently announced: Concord Premium Meats; The Meat Factory; Country Prime Meats; and Frandon Seafood.
AirBoss of America (BOS-T). After bouncing along at around the $10 level for the first couple of months of this year, this stock took off and hit a new 52-week high in mid-April. The impetus was a year-end financial report that was very positive plus a dividend increase of 9.8 per cent. For the fourth quarter, sales were US$74.2-million, compared with US$63-million the year before. Profit was US$3.8-million or 16 US cents a share, fully diluted, up from US$1.4-million or 6 US cents in 2016. Full-year profit was down slightly, but investors were encouraged by the final-quarter results, the dividend hike and strong balance sheet.
ZCL Composites Inc. (ZCL-T). This is another company that is trending higher this year thanks to decent year-end results and a dividend increase. This manufacturer of underground fibreglass storage tanks reported record revenue of $188.2-million for 2017. Profit from continuing operations was down slightly to $18.4-million or 59 cents a share, but that did not stop the directors from approving a 13-per-cent dividend hike, to 13.5 cents a quarter (54 cents a year). The stock yields 4.5 per cent at the current price.
Student Transportation Inc. (STB-T). The share price spiked sharply in late February after the company announced it has agreed to a takeover by an investor group headed by Caisse de dépôt et placement du Québec and Ullico Inc. The offer represented a 27-per-cent premium to the average trading price of the stock over the previous 20 days. The deal is expected to close by the end of this quarter; in the meantime, the stock continues to trade.
Norbord Inc. (OSB-T). These are good times for the U.S. housing industry, and this manufacturer of oriented strand board (OSB) is benefiting as a result. The company reported record production at nine of its 15 mills in 2017, and profit more than doubled, to US$4.49 a share. Norbord also reported strong demand in all of its core markets entering 2018. The quarterly dividend is now up to 60 cents a share ($2.40 a year) to yield 4.7 per cent.
Valero Energy Corp. (VLO-N). The shares of this big U.S. refiner took a dip in late January but have since moved steadily higher since the release of the 2017 financial results. The company reported profit of US$64-million for the fourth quarter and US$268-million for the full year. Both amounts were significantly higher than in 2016. The quarterly dividend was increased to 80 cents a share ($3.20 a year) effective with the February payment. Investors should keep in mind this is a limited partnership and discuss the tax implications with a financial adviser before investing.
Dream Global REIT (DRG.UN-T). Most REITs have edged lower this year, but this one, which invests in office buildings in Europe, has been climbing steadily higher. The trust reported strong growth in 2017 with fully diluted funds from operations (FFO) up by 15 cents or 19 per cent to 95 cents a unit from 80 cents a unit in 2016. FFO is the key indicator of the financial performance of a REIT. On the balance sheet side, the trust decreased its level of debt to 46 per cent from 48 per cent the year before. However, there has been no change to the distribution, which continues to be 6.6 cents a month (79.92 cents a year) to yield 5.8 per cent.
Pure Industrial REIT (AAR.UN-T). This is another REIT that has jumped in price this year, but, in this case, the gain was due to a $3.6-billion takeover bid from Blackstone Property Partners in early January. That represented a 21-per-cent premium on the share price. The deal has not yet closed, but it has been approved by shareholders as well as by various regulators. In the meantime, the shares continue to trade and pay distributions.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca.
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Gordon Pape