These are the Stocks You Want to Own in this Market
Best Canadian Dividend Stock #5
A Safe Stock for Troubled Times
Weeks like this in the stock market tend to make us want to throw up our hands and head for the safety of cash. But for income investors, like the subscribers to my Cabot Dividend Investor, that’s simply not possible. While cash won’t lose value (except from inflation in the long-term), it doesn’t earn anything these days either.
If you’re living on the income generated by your investments, you need that income to keep flowing regardless of what’s going on in the market. You can’t stop paying your bills just because the stock market is falling!
So as I tell my subscribers, if you depend on your investments for part of your income, you need to ensure that that income will continue to flow even during periods of major price declines. That means buying investments that generate “price agnostic income,” and that you’re comfortable holding through a major market downturn.
What kind of income isn’t price-agnostic? Some fixed income and equity income funds generate income using price-reliant strategies like covered calls or regular returns of capital. These are okay to own when the market is doing well, but you can’t rely on them to keep paying income when the going gets tough.
Stock dividends, on the other hand, can remain a great source of income in almost all market environments. Over the past 80 years, between 30% and 40% of stocks’ total returns have come from dividends, with the rest from price appreciation. Morningstar has crunched the numbers going back to 1927 to show that dividend income accounts for 41% of the annualized total return from large-cap stocks, 35% of the total return from mid-cap stocks and 31% from small-cap stocks.
Plus, dividend-paying stocks are less volatile than other stocks. Data collected by Eugene T. Fama and Kenneth R. French show that dividend-payers are 5% to 20% less volatile than other stocks. Dividend-paying stocks’ volatility does increase when overall volatility increases (as it has in recent years), but dividend payers are generally much calmer than non-dividend stocks.
Resilient, cash-rich dividend payers are the best vehicle for maintaining a steady income during troubled times in the market. They lose less of their value during corrections, they’re less volatile overall and they keep paying you dividends regardless of what the stock prices are doing. You do have to pick the right stocks, of course.
Today I have one such idea, and the stock has actually been rising over the past month!
It’s also the latest idea in my series highlighting the Best Canadian Dividend Paying Stocks to Buy Now.
The stock is Canadian Tire (TSX: CTC.A), one of Canada’s largest retailers. I’m sure my Canadian readers know the company well-supposedly nine out of 10 Canadians shop there at least once a year. For my non-Canadian readers, Canadian Tire is one of Canada’s largest retail chains and a sort of national Canadian icon.
The company has 490 Canadian Tire stores across Canada, selling a unique mix of auto parts, household goods, sports equipment, tools and hardware, apparel and seasonal products. The company also owns over 380 Mark’s apparel stores, 300 Canadian Tire gas stations, and a group of sporting goods stores that control over 16% of the Canadian sporting goods retail market.
The company has paid dividends since 1999, and has increased the dividend every year since 2011. The current quarterly dividend of CAD$0.50 per share yields 1.7% at today’s prices. The payout ratio, which tells you what percentage of earnings the company pays out as dividends, has remained steady at around 20% for years, showing that the company can easily afford its dividend.
Canadian Tire’s EPS and operating income have both increased steadily every year since 2009, and the company just announced an ambitious new three-year plan for growth that was warmly embraced by investors. The plan calls for average EPS growth of 8% to 10% between 2015 and 2017, and for commensurate growth in the dividend.
The company’s commitment to the dividend and reliable earnings growth make Canadian Tire the kind of reliable income stock that is a pleasure to hold through corrections like today’s.
Canadian Tire only trades on the Toronto Stock Exchange (TSX), under the symbol CTC.A. If you can’t find the stock on your broker’s website, they may not support trading on international exchanges. In some cases, you may have to sign up for special permission to trade international stocks (called “International Stock Trading” at Fidelity (not available on retirement accounts) and “Global Investing” at Schwab.)
Some brokers that do let you trade Canadian stocks will list them under a 5-letter “international symbol” instead of using the symbol used on the TSX. The goal is to avoid confusion with U.S. stocks using the same symbol. For example, Gold Wheaton trades under the symbol GLW on the TSX, but GLW is also the symbol for Corning on the NYSE. So some U.S. brokers use the unique, 5-letter symbol GLDWGF for Gold Wheaton instead.
However, confusion arises because GLDWGF is also a pink sheet symbol for Gold Wheaton. So while some brokers might use it to denote buying Gold Wheaton on the TSX, in Canadian dollars, others might be referring to the shares traded on the pink sheets.
You can check you’re buying the stock you want on the exchange you want by looking at the volume on the 5-letter symbol and comparing it to the volume on the actual Canadian stock. Or call your broker and ask them if the purchase will be made on the TSX, in Canadian dollars. Your broker may use the 5-letter symbol CDNAF for Canadian Tire’s Toronto listing.
Chloe Lutts Jensen
Chief Analyst, Cabot Dividend Investor