Growth stocks have been front and centre over the past couple of years, and in this segment we switch gears and take a deep dive into dividend stocks.
Mathis Baumbach, portfolio manager and investment advisor with Richardson Wealth, joins The Market Online as we focus on Canadian dividend stocks.
Baumbach discusses the stability dividends provide for conservative investors especially in times of market turmoil. He also notes that, “There also seems to be a growing number of seasoned speculators that are looking for a way out of the game of volatility, and they seem to find a good value proposition with dividends.”
Baumbach says he has a bias for Canadian dividends but says, “It’s always good to diversify geographically and there are (also) some good options in the U.S. and Europe.”
Canadian dividends
He points out a lot of regulated businesses are in Canada such as utilities, telecoms, pipelines, even the banks to some degree. This “creates an environment where companies have pretty good control over their cash flows, and that subsequently allows them to pay predictable, often generous dividends,” Baumbach says.
Another attractive proposition he addresses is the Canadian dividend tax credit, which, “allows investors to keep more of the dividend yield they earn, which makes a huge difference for income investors with large taxable investment accounts.”
Three types of dividend stocks
Baumbach outlines three categories of dividend-paying stocks – high-yield dividends, dividend growers and low-yield dividend.
On the high-yield dividends, he highlights Enbridge Inc.(TSX:ENB) with its 6.8 per cent yield with predictable business models and reasonable payout ratios. Baumbach also cautions on high-yield options that might take an aggressive approach, using leverage and paying too much of their cash flow.
In the dividend growers category he looks at Fortis Inc. (TSX:FTS). Fortis has grown a dividend for 50 consecutive years, now yielding 4 per cent. “I think this dividend growth can almost act like a partial hedge against inflation. So a basket of stocks with a long track record for paying and increasing their dividends should serve as a good foundation to build a dividend portfolio,” Baumbach says.
On the low-yield dividend, mega-cap technology stocks are options in this category. He notes that, “Microsoft Corp. (NDAQ:MSFT) reinvests considerable amounts back into their business for growth, but if it lacks reinvestment opportunities, any excess capital can be returned to shareholders via their dividend, which currently sits at ¾ of a percent. I like that as a shareholder.”
With interest rates projected to be lower next year, Baumbach addsthat “One-year GICs now pay in the mid-4 per cent and corporate bonds range between 5-6 per cent. Those will likely be lower next year.” He further notes that, “For income investors, this is still a great opportunity to blend fixed income with dividend stocks to create a diversified income portfolio.”
You can also watch a previous interview with Baumbach: How will the U.S. elections impact U.S. and Canadian markets? You can also reach out directly to him at mathisbaumbach.com.
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