But before you plunge in, it’s vital to remember yield has another meaning: caution.
Over the past year, there have been mounting concerns about the global economy. Rising geopolitical risks, like Brexit and U.S.-China trade tensions, falling interest rates and slowing earnings growth have been steering investors into dividend stocks, driving up their valuations. “It’s hard to find cheap dividend stocks today,” contends Michele Robitaille, managing director at Guardian Capital LP, but she believes they are still the best option for investors right now. With all signs pointing to a recession, dividend stocks will offer investors some safety over the mid- and long-term, she says.
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As much as dividends can offer investors an incentive to own stock while waiting out rough markets, they are not without risk. Dividend stocks can suffer if a company has to cut its payout, and a slowing economy can increase the pressure on these stocks as well. “Bad balance sheets and cyclical earnings can hurt a company’s ability to distribute income when the growth outlook is weaker,” says Don Newman, the portfolio manager who oversees Fidelity’s $1.5-billion Canadian Dividend Fund. Investors need to be keenly aware of how sustainable those dividends are; sometimes they’re not.
Perish the thought, but it happens. Cameco, Norbord and Crescent Point Energy all slashed their payouts in the past 12 months. Over the past five years, one in 10 of the 100 companies on this year’s list trimmed their dividends.
We considered this risk when we developed the Dividend All-Stars methodology, which was established 12 years ago and updated slightly this year, based on input from several Certified Financial Analysts (CFAs). While we seek out companies with plump yields, we focus on the ones that can maintain them. We place as much weight on a company’s ability to maintain and grow its dividend as we do on its yield. This squeezes out many of the oversized yields, which reach as high as 13% this year.
Before we offer our final grades, we also want to be sure we’re identifying companies that provide value. As much as dividend investors love the concept of being paid to wait, we don’t think investors want to extend that period by overpaying upfront for that privilege. And as Robitaille points out, the utility and REIT sectors, which have a strong history of being income-generating stocks, are not as cheap as they were at the start of the year.
Ten stocks are worthy of A-grades this year, including four-returning All-Stars from the 2019 edition of this report. All of these companies are in an excellent position to grow their dividends again due to their low payout ratios, strong earnings potential and low debt levels.