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Low interest rates have forced many income-oriented investors to make some basic strategic changes. Fixed-income securities remain unattractive, with many bond mutual funds and ETFs in negative territory this year. Returns on cash accounts, even the high-interest variety, are less than half the rate of inflation. That means your money is losing purchasing power every year, and if it’s in a non-registered account, the tax on your interest just adds insult to injury.
That leaves dividend-paying stocks as the main alternative for someone who is looking for cash flow. There are plenty of them available but use discretion in making purchase decisions. For example, an unusually high yield typically signals trouble. Investors may have driven down the price of a stock because of concerns over weak financial statements and/or fear of a dividend cut. If the payout is more than 7%, ask some questions. There’s a problem somewhere.
The nirvana for income investors is a stock that not only offers a decent dividend now but is likely to continue to raise its payout in future years. Where do you find them? Here are three sectors to explore.
In March 2020, the Office of the Superintendent of Financial Institutions (OSFI) announced a prohibition on dividend increases by financial institutions, including banks and insurers. The goal was to increase liquidity in the face of the economic uncertainty poised by the pandemic, which was just taking hold. The OSFI estimated the measure would support $300 billion worth of additional lending capacity. The prohibition was to remain in place at least 18 months.
In November, the OSFI announced the ban was being listed. Manulife and Sun Life immediately announced double-digit dividend increases, and the banks will likely follow suit.
For example, Royal Bank (TSX: RY) currently pays a quarterly dividend of $1.08 per share ($4.32 annually) to yield 3.35%. It could easily raise its payout by 10%, which is not out of line given its rise in profits – in the latest quarter, the bank reported net income of $3.9 billion, up $646 million (20%) from the same period last year. Earnings per share were $2.68, up 20%. For the full fiscal year ended Oct. 31, RBC reported net income of $16.1 billion (up 40% from last year) and EPS of $11.06, up 41% from 2021.
A 10% hike would raise the quarterly dividend to $1.188 ($4.752 a year). Based on the price at the time of writing, that would increase the yield to almost 3.7%.
Steady dividend increases from our financial institutions are almost a sure thing going forward. Anyone looking for dividend growth should start here.
It should come as no surprise that the two companies with the longest record for consecutive annual dividend increases (48 years) are both utility stocks – Fortis Inc. (TSX: FTS) and Canadian Utilities (TSX: CU).
That’s because utilities may be dull (you rarely see any big moves in their share price), but they’re dependable. Most of their revenue is regulated, which means they’re almost certain to be granted a rate increase each year. Plus, they constantly expand their rate base through capital investments or acquisitions.
Recently, Fortis announced a 5.9% increase in its dividend, effective Dec. 1 and said it expects to continue annual increases at about that rate until at least.
Halifax-based Emera Inc. (TSX: EMA) recently raised its annual dividend to $2.65 per share (from $2.55), for a yield of 4.5%. The company said to expect annual increases in the 4%-5% range through 2024.
Canadian Utilities hasn’t yet announced its new rate for 2022 but that should come soon. The stock currently yields 5.0%.
Last year was a disaster for traditional energy companies. The bottom fell out of the global economy after the pandemic took hold. Oil prices plunged into negative territory at one point. Companies were losing money on every barrel they sold. Not surprisingly, dividends were slashed or even eliminated entirely. Several small companies were taken over or went belly-up.
What a difference a year makes! Oil and natural gas prices have rebounded in 2021 and so have the fortunes of those who held on to key energy stocks. For example, Calgary-based Tourmaline Oil (TSX: TOU), the country’s largest natural gas producer, recently announced a special cash dividend of $0.75 a share and has increased its regular quarterly dividend twice so far this year.
Suncor Energy Inc. (TSX: SU) announced recently it is doubling its dividend, returning it to 2019 levels. Canadian Natural Resources Ltd. (TSX: CNQ) increased its dividend by 10.6% earlier this year. PrairieSky Royalty Ltd. (TSX: PSK), has implemented two dividend increases this year, increasing the quarterly payout by 50%, to $0.09 per share. Freehold Royalties (TSX: FRU) has hiked its monthly payouts four times in the past year, from $0.02 to $0.06 per month. At that rate, the stock yields 6.3%.
Many energy companies have yet to make a move on restoring or raising their dividends. But if oil and gas prices remain near current levels or move higher, bottom lines are going to look much healthier, paving the way for dividend increases.
This sector carries a lot more risk than banks and utilities. But the potential rewards are significant.
Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.
Follow Gordon Pape on Twitter at https://twitter.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney.
Notes and Disclaimer
© 2021 by The Fund Library. All rights reserved. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.
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