While we were recording our “Ask Us Anything; Answers” video last week, I couldn’t help but notice that several of the questions were surrounding income investing. While Craig did a fine job of looking at the structure of bonds and discussing our view on buy/hold vs. trading dividend stocks, we didn’t specifically touch on dividend stock sectors from a technical point of view. Today, I will touch on a few of the more common income (or dividend) equity sectors that investors like you may be interested in.
Broad dividend ETF
I’ll start off by looking at the broad classification of “dividend stocks” via the BMO dividend ETF. Please understand that dividend stocks are NOT a sector. Different sectors will exhibit differing patterns without commonality. So bunching them together and charting them is kind of a waste of time insofar and being predictive. Thus, I wont spend much time here. But for what its worth, the ZDV ETF looks like the market. In other words, no edge here. Its just a bunch of stocks stacked together that happen to pay good / reliable dividends. You don’t get much downside or upside alpha by owning it vs the market, beyond the income. That income is above that of the TSX – its near 4.2% at current pricing.
Here’s the iShares CDN Utilities ETF. Nice sideways pattern. Much better than the market. Not a great yield at current pricing – something like 3.3%. But its been stable in price within a tight range, and that’s not such a bad thing in this market.
The BMO Equal Wt Bank ETF took quite a pounding this year. Like the market, banks may be finally basing. Its gone down enough to yield about 4% at this time. Like the market, I would wait for a breakout before getting too excited. But, if you feel comfortable in buying in the base, and keep a stop below $32, its perhaps on OK addition to an income portfolio. We hold some of the covered call of this ETF in our Income Platform. Patient investors only need apply to this sector. Of note: new loan loss provisions by the banks suggest they see trouble ahead in the Canadian economy – given our highly leveraged consumers. So this isn’t a slam dunk buy.
There is no telecom ETF in Canada, but we have owned BCE off and on in our Income Platform. We do hold it at this moment. Its kind of a benchmark for the sector. The stock bounced off of a first-level of support recently after a nasty plunge. So far so good. Great yield at 5.8%. All in, not such a bad looking chart for a dividend seeker not looking for immediate upside. Mind the enhanced volatility of late though. If things get rough on the markets again, BCE, and its brethren, may follow.
With the exception of TC Energy Co, which has been in a nasty downtrend of late, most of the pipelines are flatlining. That’s a good thing in this market – just like the utilities noted above. I could pick any one of them, but for kicks n giggles I put Keyera’s chart here for an example. Nice 6.2% yield (many of the pipe’s have high yields so do look at all of them).
This’d be yer’ basic sideways pattern, eh. Sideways patterns are great in that you know what to expect & can time ideal buy points as the stock gyrates through the pattern.
REIT’s are not in dividend stock ETF’s like the BMO issue noted at the top of this blog. Clearly, this sector, like the banks, has been very market-driven in price action. Perhaps its basing. It will likely follow the market, so you need to pay attention to broad market patterns, rather than buy and relax like you can with the utilities, or pipelines noted above. The yield, which is NOT eligible for dividend tax relief, is still darned near 5.5% at current prices. Not a bad yield, but you need to decide if the broad bear market is over before buying – like you will need to do with the banks. More market mayhem could be hard on this sector. Market upside, however, may provide great opportunity.
There are too many types of preferred shares to describe in this short blog, so I’d recommend you read my first book, SmartBounce to understand how they work. There are a few ETF’s in Canada allowing you to buy them in a group– but keep in mind that some preferred share types like floaters or fixed/resets may do better as rates rise, vs. fixed or perpetual. The BMO version uses resets and ladders them over 5 years. The Horizons one is more active. Anyhow – read my book to understand them better, and go from there. The BMO ETF chart below, for what its worth, shows a clear downtrend. The 5% dividend doesn’t offset the ugly chart, in my opinion.
Last call for the Toronto MoneyShow
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Does it make sense to buy dividend stocks when the Bank of Canada is still raising interest rates?
I’d go by the charts more than anything–but in my opinion, the BOC and the FED will be forced to slow and eventually discontinue their hiking some time in the coming 3-6 months. Why? Because we are entering recession. Thus, the 2% target for inflation wont be hit, and we will have to settle for what is, quite frankly, the long termed average for inflation anyhow–which is in the low 3’s, to perhaps 4%. I liken the current situation to the 1970’s. High inflation, a Fed that did NOT acknowledge it (like our guys giving the transitory speech), then a catchup play, and a recession. The playbook is identical today – amazingly stupid!!! Worse, actually, because US and Canada have left wing governments who believe in modern monetary theory – which has and is driving inflation to higher levels than just the impacts of supply etc. So– long story short: I’d watch the charts for a while, but so far (eg) utilities and pipes have been pretty stable. The telecoms and banks will need to see actual evidence of the Fed/BOC stating they will go neutral (and possibly even soften in second half 2023). The charts will show pricing moves in anticipation of that happening, but it is yet to be seen. Hope that helps
Good morning Keith,
Regarding the telecom section, in the recent past, a telecom yielding 5% was delightful to investors, but with an inflation of 8% for North America and 12% for the U.K, that dividend is no longer enough. One would think that 5% is better than 0% (keeping it in cash) but the debt to equity ratios is probably what’s keeping some away : the debt gets costlier and the company may suspend dividends. Not a sure thing, but it’s now a possibility. For sure, Bell isn’t the worst in terms of debt and that’s why the stock didn’t fall much relatively, but it’s a worry.
Also, you can get a 4% GIC.
Absolutely Matt– its interesting, as we migrate back n forth between fixed income and stocks in our Income Platform. It was a no brainer to own dividend stocks over the past decade–overweight that side of our model. Now, we see the other side, per your comment, as attractive. Inflation wont stay at 8% (it will likely settle near 4% per my prior posts) so rolling short termed paper (short paper = less price vol) with decent yields may become very valuable parts of our plan–unlike the recent years where they were a drag on performance
Hello Keith, what are your thoughts on defined outcome etfs.?
Pretty hard for me to paint anything with a broad brush, but in my experience, they bet on conditions being contained within long termed averages, which works until it doesn’t eg- a bear comes along and changes the paradigm. A very old friend of mine in the “Advisor” – (he buys investment products for clients – does not trade individual securities) – bought one of these ETF’s that promised steady but low returns with a “can’t lose” strategy –then this year happened, and the sh*t hit the fan.
WHERE DO YOU SEE THE CANADIAN DOLLAR HEADING FOR THE SHORT TERM?
J.P. (C.S.T.A. MONTREAL)
Read my blog here: https://www.valuetrend.ca/canadian-investors-and-the-usd/