If you want a high dividend yield, prepare to sacrifice dividend growth. If you want dividend growth, prepare to sacrifice a high yield. So go two of the key rules of dividend investing.
Is there a middle ground? I went in search of one by running a quick screen of stocks in the S&P/TSX 60 index using the dividend view available on the Watchlist feature on The Globe and Mail website.
We happen to have a bumper crop of high-yielding blue chip stocks these days. But a high yield has its costs. Investors are down on these stocks - that’s why the yields are as high as 6 to almost 9 per cent. Elsewhere in the dividend space, there are stocks that have participated in the broad market rally of the past year or so and thus offer diminished dividend yields.
My screen started with the big blue chips of the S&P/TSX 60 ranked from highest dividend yield on down. The next step was to find stocks with a yield of 3 per cent or more and a double-digit five-year annualized dividend growth rate.
Here are the five stocks on the final list:
Canadian Natural Resources Ltd. (CNQ-T): Riding the energy sector wave of the past year, CNQ shares have jumped 32 per cent. But the stock still yields 3.9 per cent, and dividend increases have averaged 22.5 per cent over the past five years.
Canadian Tire Corp. (CTC.A-T): The shares have been hit hard lately because of concerns about the impact of a slowing economy - that explains the dividend yield of 4.9 per cent. The dividend has increased by an average annual 13.9 per cent in the past five years. Slower growth is certainly possible if sales and profits are under pressure.
Open Text Corp. (OTEX-T): Tech has been strong lately, but Open Text shares are down about 24 per cent in the past year. The dividend yield is 3.2 per cent, and the five-year dividend growth rate is 12.2 per cent.
National Bank of Canada (NA-T): A dividend yield of 3.7 per cent and a five-year dividend growth rate of 10.3 per cent. The shares are up 12.5 per cent in the past year, among the best performances by big bank stocks.
And, finally, one stock that is close enough on dividend growth to warrant inclusion here. It’s Manulife Financial (MFC-T), with a dividend yield of 4.5 per cent and five-year dividend growth of 9.9 per cent. Manulife shares are up about 40 per cent in the past 12 months.
-- Rob Carrick, personal finance columnist
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Stocks to ponder
Magellan Aerospace Corp. (MAL-T) This is a Toronto-based company in the aerospace industry supplying components and parts to the commercial and defence sectors. Two customers, Airbus and Boeing, make up 36.5 per cent of total revenues. As a result, any delays and cancellations for Boeing product will affect the Magellan order book and delivery schedule in short order. Unlike Boeing, however, Magellan does not have a leveraged balance sheet or a stock price dependent on a management turnaround of operations. Robert Tattersall tells us why it deserves a spot on your watchlist.
The Rundown
How this retired military member built up an $883,500 TFSA that generates $11,000 a month in tax-free income
Marcus, 67 and now retired from the military, opened a tax-free savings account as soon as the investment vehicle was created in 2009. After a few years of having the funds invested in a simple, low-paying savings account on the advice of his local bank branch, he took matters into his own hands, first using a dividend strategy, then redeploying the funds into a growth stock. Today his TFSA is worth $883,500. He’s also generating about $11,000 in monthly income – all tax-free. Darcy Keith tells us how he accomplished the feat. (And, if you too have had unusually big success with TFSAs, let us know here.)
Stocks driving the TSX: RBC becomes biggest contributor to Composite returns over last three months
Scott Barlow takes a look at the stocks that have been the biggest point contributors and detractors for the S&P/TSX Composite Index’s 1,000-point-plus return over the last few months.
Also see: The highest-yielding stocks on the TSX, plus risk data
Short sales on the TSX: What bearish investors are betting against
Larry MacDonald has this month’s overview on what short sellers are up to. Among the findings, a Canadian oil company tops the list for the highest percentage of float sold short.
Others (for subscribers)
Andrew Coyne: Eighteen years and $46-billion later, the CPP admits it could have earned more just by buying index funds
Number Cruncher: Utilities with dividends that stand to gain as interest rates decline
Friday’s analyst upgrades and downgrades
Thursday’s analyst upgrades and downgrades
Friday’s Insider Report: CEO accumulates shares in this beaten-down lumber stock
Thursday’s Insider Report: Chair unloads $1.5-million from this tech stock
Ted Dixon on insider buying: Robert Wares catches a copper wave at Osisko Metals
Monica Rizk: Bullish on Canadian National Railway
What to expect as U.S. and Canada move towards faster stock settlement
Ask Globe Investor
Question: I am semi-retired and my wife is still working. We try to maintain a roughly 60/40 split of stocks vs. fixed income. We have a handful of individual stocks but most of our equity position is in exchange-traded funds. About 12 per cent of our portfolio in the Vanguard S&P 500 Index ETF (VFV-T). Do you think it is risky to hold such a large position in one ETF? Should I diversify into more than one ETF for the U.S. portion of our portfolio?
Answer: I don’t think you need to sweat this too much. If you had 12 per cent of your portfolio in a single stock, that would definitely be risky. But having 12 per cent of your portfolio in a broadly diversified ETF doesn’t raise any red flags for me.
The purpose of an index ETF, after all, is to provide diversification, and S&P 500 funds such as VFV do just that, and at a very low cost (VFV’s management expense ratio is just 0.09 per cent). True, technology stocks account for nearly 30 per cent of the S&P 500, but financials, health care and consumer discretionary stocks also have double-digit weightings, with high single-digit contributions from communications, industrials and consumer staples. So you’re getting a nice cross-section of the U.S. economy, which helps to control your risk.
You could achieve even greater U.S. diversification with a product such as the Vanguard U.S. Total Market Index ETF (VUN-T). It holds more than 3,700 U.S. stocks, compared with the 500 largest U.S. companies in the S&P 500. However, VUN and VFV have a great deal of overlap, particularly among their largest constituents, and consequently their returns have been very similar. For the 12 months ended April 30, VFV’s total return - including dividends - was about 24.3 per cent, compared with 24 per cent for VUN.
If anything, you could even increase your weighting in VFV by a few percentage points to get more U.S. exposure. Depending on your risk tolerance, you might also benefit from increasing your overall equity weighting to more than 60 per cent. Some investors have found that the 60-40 mix, which has been a popular rule of thumb for decades, is too conservative given that people are living longer and stock returns have handily beat bonds. But if the 60-40 split helps you stay disciplined and lets you sleep at night, then by all means stick with it. But don’t lose any sleep over having all of your U.S. equity exposure in a single, well-diversified ETF.
--John Heinzl (E-mail your questions to jheinzl@globeandmail.com)
What’s up in the days ahead
For many investors, a bet on copper has paid off. But what can they expect now that prices are soaring? David Berman will share his thoughts.
Click here to see the Globe Investor earnings and economic news calendar.
Reminder: The Globe Investing Club wants your stock picks
The Globe Investing Club recently returned for its second year and readers have until May 30 to submit their stock picks for the competition. You can join the official club newsletter here, which will provide regular updates on all the action, or submit your own picks.
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Compiled by Globe Investor Staff