Join Fund Library now and get free access to personalized features to help you manage your investments.
The stock markets continue to set new records, and investors keep piling in, even though many feel prices are uncomfortably high.
It’s the same problem we’ve been facing for months – there are no acceptable alternatives. Bonds, which are the normal offset to stocks in a balanced portfolio, are having a bad year. As of Aug. 6, the FTSE Canada Universe Bond Index was down 2.58% year-to-date, and we’re unlikely to see a reversal any time soon as inflation heats up. Bottom line: Bonds look like a money loser for the rest of 2021.
You can avoid losses by moving to cash, but don’t expect much of a return. RBC is paying 0.05% on its High Interest eSavings account. You can earn more at some smaller financial institutions, but many people are uncomfortable dealing with them, even though many have CDIC coverage.
What’s the solution? One strategy is to reduce the equity risk in your portfolio by using low-volatility, dividend-paying stocks in place of bonds. Think of them as bond substitutes.
The stocks to consider should have a low beta, which measures their level of volatility against the broad market. These will perform better when the market drops but will lag when stocks are on the rise. The market beta is 1.0, so the more the stock is below that, the less volatile it is.
The dividend payout will tend to provide a floor – companies try to protect their dividend to the extent possible, knowing that a cut will negatively impact the share price and erode investor confidence.
This does not mean that bond substitutes won’t lose value in a market plunge. But they will typically hold up better than the rest of the crowd.
Here’s a stock I consider to be a bond substitute. Prices are as of the close on Aug. 6.
Emera Inc. (TSX: EMA)
Type: Common stock
Current price: $58.45
Annual payout: $2.55
Yield: 4.4%
Risk: Lower risk
Website: www.emera.com
This utility is based in Halifax. Its business is primarily in regulated electricity generation and electricity and gas transmission and distribution. Emera has investments throughout North America, and in four Caribbean countries.
It’s not exciting stuff, but the company is about as stable a stock as you’ll find. It has a beta of only 0.21, which means that if the broad market dropped 10%, this stock should in theory lose only a little more than 2% of its value. In the meantime, you’d continue to collect a quarterly dividend of $0.6375 a share, which is expected to rise by mid-year. The company has guided to annual dividend increases of 4%-5% through 2022.
The company started off the year with some solid numbers. First-quarter adjusted earnings per share increased by $0.17, to $0.96, driven by continued strength in the regulated portfolio, increased marketing and trading earnings and lower financing and other corporate costs, partially offset by a stronger Canadian dollar.
Emera plans to invest $7.4 billion in capital expenditures over the next three years, with the potential for an additional $1.2 billion over the same period. The company is forecasting rate base growth of 7.5-8.5% through 2023. It is on track to invest more than $2 billion in 2021, increasing its rate base by 6% to $22.5 billion.
For fiscal 2020, the company reported adjusted net income of $665 million ($2.68 per share), compared with $621 million ($2.59 per share) in 2019. The major contributor to the profit increase was the company’s investment in Tampa Electric, which contributed $501 million, compared to $419 million in 2019.
As I said, there is nothing exciting about this business. But its stable share price and decent yield make it a very attractive bond substitute.
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.
Join Fund Library now and get free access to personalized features to help you manage your investments.
Fund Library
