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.
Typically, our All-Stars team includes strong representation from the big banks, but not this year. It’s been a mixed year for the banks amid concerns about the housing market and the broader economy, although that sentiment is starting to shift again.
CIBC is the only bank to earn top marks with its 5.15% yield. The higher yield, in this case, is indicative of a down year rather than a dramatic increase in its quarterly distribution. Subsequently, between its healthy growth in its earnings in recent years and its relative value, it’s an interesting opportunity.
Insurance companies tend to perform well on the Dividend All-Stars, but investors need to be mindful of the shifting interest-rate environment. Falling interest rates may be a bit of a drag on these stocks, warns Robitaille, although they are trying to immunize themselves by implementing hedging strategies to minimize the impacts of interest rates and equity market movements on their underlying investment books.
While high yields can be a warning sign, they can also suggest a company is undervalued. That’s the principle behind the Dogs of the Dow strategy, where investors buy the blue-chip stocks with the highest yields and sell them at the end of the year.
If a sharp increase in yield can indicate that a stock is oversold—meaning the share price has fallen too far, too fast—then Methanex may be a company worth a closer look. While Methanex isn’t a blue-chip stock, it is the world’s largest producer and supplier of methanol to major international markets in North America, Asia Pacific, Europe and South America. In case you’re wondering, methanol is an extremely important ingredient used to produce hundreds of everyday industrial and consumer items, including paints and plastics, although the greatest demand comes from the energy sector.
The Vancouver-based methanol producer was beaten up last year. Shares fell by almost half due to low methanol prices and a change in strategy that has upset one of its major investors. The company is undertaking a major capital investment program, which could put some stress on its balance sheet and limit the company’s ability to buy back shares.
Still, it ticks all the right boxes. The company’s payout ratio is still below 30% and it has a history of increasing its dividend, plus its high yield (which is now at 4% up from 1.9% in 2018) and current valuation has investors kicking the tires.