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Jun 29, 2023

Yield-Seeking Retirees Should Stick With Boring Companies

by Richard Morrison

My friend John’s career ended abruptly a few years ago before he could accumulate enough savings to fund a comfortable retirement. To supplement his modest pension income, John considered investing in government bonds and savings accounts whose yields had been climbing along with interest rates. Despite the higher yields, the resulting income stream from these conservative investments was not enough to fund the standard of living to which he’d become accustomed.

“I’d gotten used to luxuries like food and shelter,” he quipped.

John decided to enhance his income by investing in tiny companies with high dividend yields, even if they were heavily in debt and paid out much more than what they brought in. Their share prices were already down—the reason their dividend yields were high— but after he bought them, they fell further, and some cut their dividends or abandoned them entirely. Bitter and discouraged, John sold off his micro-caps and reinvested in large, established companies with long histories of dividend increases.

There is little chance of any of the new names in John’s portfolio suffering the same fate as the old ones. However, none of John’s new “boring” holdings does anything revolutionary, so their share prices will likely only track the underlying index. Some have had relatively poor returns when measured over the past year since the S&P/TSX Composite turned out to have been trading at a peak in the spring of 2022.

The share prices of large companies such as utilities and banks typically fluctuate within a band. Restless investors can actively trade these liquid stocks, skimming off some profits if the price appears to be spiking above a certain threshold and reinvesting the cash when something appears to be trading at a low, although simply leaving things alone usually works, too.

The average dividend yield of 6.67% for the five companies mentioned here should provide a generous income stream with relatively low risk, making them suited for investors seeking steady dividend income. Investors who don’t need the dividends as income and want to gradually add to their holdings can subscribe to Dividend Reinvestment Plans (DRIPs) which automatically reinvest the dividends in more shares of the issuing company, sometimes at a discount. A DRIP helps companies generate funding but is sometimes dropped when a company would rather pay cash dividends.

Enbridge Inc. (ENB)

Calgary-based Enbridge is a giant in the energy pipeline sector, moving about 30% of the oil produced in North America and 20% the natural gas used in the United States. Based on the number of consumers, Enbridge is North America’s third-largest natural gas utility.

As of early June 2023, Enbridge’s share price had fallen about nine per cent since the beginning of the year, lagging the TSX Composite, but its market capitalization (shares times share price) is still $99 billion, making it the fifth largest company in Canada.

Enbridge has paid dividends for the past 68 years, and over the past 28 years, the dividend has grown at an average compound annual growth rate of 10%, the company says. The most recent dividend hike came in December, when the company announced a 3.2% increase, raising it to $3.55 for a yield of about 7.2%. The dividend payout ratio appears worrisome as analysts expect Enbridge to earn only $2.92 per share in 2023, but the company says the ratio is expected to remain within its target payout range.

Enbridge suspended its DRIP in 2018. While the dividend appears safe, all pipeline stocks may be hurt by factors such as oil leaks and the resulting lawsuits and protests, along with natural occurrences such as wildfires, which force pipelines to shut down what are obviously extremely flammable facilities.

TC Energy Corp. (TRP)

Like Enbridge, TC Energy operates oil and gas pipelines serving North America. The shares are well down from their peak above $70 in the spring of 2022, but the company still has a market capitalization of about $55 billion.

TC Energy has increased its dividend since 2000 at a compound annual rate of about seven per cent over the past 23 years, with the latest 3.3% increase bringing the annual dividend to $3.72 for a yield of about seven per cent. TC Energy’s DRIP program lets signatories use their dividends to buy more shares at a two per cent discount, and fractional shares are also credited to the participant’s account.

The company has grown its assets to more than $100 billion from $25 billion in 2000. TC Energy has another $34 billion in projects that should support annual dividend growth of three to five per cent, the company’s site says.

Last year, TC Energy lost $1.44 billion from its Canadian natural gas pipelines, depressing total earnings to $3.63 billion from $4.06 billion in 2021. Things appear to have turned around this year, however, as first-quarter net income attributable to common shares reached $1.3 billion or $1.29 per common share compared to $0.4 billion or $0.36 per common share in the first quarter of 2022, the company said.

Pembina Pipelines Corp. (PPL)

Pembina’s operations are more focused on Western Canada than either Enbridge or TC Energy, with gathering, fractionation and storage facilities, as well as pipelines that connect the Western Sedimentary Basin and Bakken formations to their downstream markets. 

Pembina’s share price took a huge hit when the global pandemic surfaced in 2020, but since then, the shares have closely tracked the performance of Enbridge, giving the company a current market capitalization of $23.3 billion. Pembina has consistently increased its dividend, and after the company moved to quarterly dividends from monthly payouts earlier this year, Pembina increased the dividend by 2.3%. The annual dividend of $2.67 yields about 6.5%. The company’s dividend reinvestment plan was suspended in 2017.

In February, Pembina reported record revenue, earnings, and cash flow for 2022, with earnings of $2.97 billion or $5.12 per share on revenue of $11.61 billion. 

BCE Inc. (BCE)

Canada’s largest telecom company, BCE, operates under the Bell, Bell Aliant and Bell MTS brands, with services including Bell Mobility, Virgin Plus (formerly Virgin Mobile) and Lucky Mobile wireless, high-speed Internet, IPTV and Satellite TV, while Bell Media has assets in television, radio and digital media.

BCE’s shares typically move roughly in line with the TSX Composite. The company has paid out dividends since 1983 and has increased them every year since, the company’s site says. The latest hike, a 5.2% increase announced 2 February 2023, was the fifteenth consecutive increase of five per cent or more since 2008, the BCE site says, noting that dividends are kept in a range of 65% to 75% of free cash flow. The annual dividend of $3.87 yields 6.26% at recent prices, and a DRIP is available.

In the first quarter 2023, BCE’s operating revenues increased by 3.5% to $6.054 billion from $5.85 billion in the first quarter of last year, but adjusted net earnings slipped 4.8% to $772 million or $0.85 per share.

Bank of Nova Scotia (BNS)

Share price charts of the big five Canadian banks show that over the past one, five and ten years, TD and Royal are almost always the best performers, while CIBC is a consistent laggard and BNS, with its extensive foreign operations, has what appears to be a permanent home at the bottom. For income investors seeking high yields, however, Scotiabank has been paying out dividends since 1833, and its current annual dividend of $4.24 yields 6.38%. The bank offers a dividend reinvestment plan with a two per cent discount.

Scotiabank’s fiscal second-quarter results fell short of analysts’ estimates as the bank’s loan loss provisions jumped. Net income fell to $2.16 billion or $1.69 per share on revenue of $7.93 billion, down from net income of $2.75 billion or $2.16 per share on revenue of $7.94 billion.

Exchange-Traded Funds (ETFs)

Investors who don’t want to hold individual stocks can buy into an Exchange-Traded Fund (ETF) focused on companies whose dividends generate a high yield. Among these are funds such as the Vanguard Canadian High Dividend Yield Index ETF (VDY), which has a yield of 4.46%. The fund’s ten largest holdings include the biggest Canadian banks, telecom companies and utilities, together with a few of the largest oil and gas companies, while its 49 other holdings include the sort of smaller high-yielding names whose payout ratios and dividend histories suggest more risk. Another possibility is the iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (CDZ), with a monthly distribution that yields 3.97%, although its management expense ratio of 0.66% is much higher than VDY’s 0.22%.

Corporate Bonds

Income-seeking investors need not focus on common shares as some Canadian corporate bonds generate high yields. For example, as of early June 2023, the BMO Investorline site listed a dozen corporate bond issues that yielded more than six per cent, including four paying out more than seven per cent, although the quantity of bonds available for purchase is always limited and fluctuates by the hour.

Richard Morrison, CIM, is a former editor and investment columnist at the Financial Post.