Gibson recommendationThis article appeared in the National Post -section FP INVESTING- page IN1 -column Trading Desk.
"A portfolio consisting of all the stocks that have a higher yield than the benchmark 10-year U.S. treasury bond have outperformed their peers by a whopping eight percentage points a year over the past 50 years, according to Desjardins Securities strategist Peter Gibson.
A dividend yield can be high because investors have genuine concerns about a company's ability to pay the dividend, perhaps because of declining profitability or a rocky future (Bombardier Inc., whose B-class shares are yielding 4.05%, is a prime example here). However, Mr. Gibson notes that the overall strategy has prevailed even when some companies have met the market's expectations and slashed their dividends.
"This was more than offset by other stocks where management was determined to keep the dividend and cut costs and managed to turn the operations around," he said.
In the S&P/TSX composite index, there are just eight stocks that meet this requirement right now. TransAlta Corp., Manitoba Telecom Services Inc., Rothmans Inc., Laurentian Bank of Canada, Russel Metals Inc. and Emera Inc. have dividend yields that exceed the 4.2% yield on the 10-year U.S. treasury bond. BCE Inc. comes very close, with a dividend yield of 4.13%.
"However, only Manitoba Telecom, Emera, Russel Metals and BCE have stable profitability -- the rest are showing sharply declining profitability, so that the long-term sustainability of the dividend for the other companies is questionable," Mr. Gibson said.
He has a "long-term buy" recommendation on BCE and Russel Metals, which he believes have a high probability of outperforming."