Income Investors: How to Protect Cash Flow in a Falling Market

Gordon Pape | May 17th, 2022

Photo: alexsl/Getty Images

The clouds have been gathering for some time. Now the storm is hitting, and it may be months before the skies clear.

April’s market selloff was surprising only in that it was so long coming. Investors seemed determined to ignore all the warning signs, including the global economic impact of the war in Ukraine, the sudden and rapid rise of inflation, the increasingly hawkish pronouncements of our central bankers, the ongoing supply chain issues and the lingering effects of the pandemic.

Yes, the markets always climb a wall of worry. But this looks more like a skyscraper.

Last week a friend who spent many years in the investment industry reminded me of something his mentor once told him: “Once a price trend has been established in either direction, prices go much further than you would have thought possible.”

That’s an ominous thought in a declining stock market.

Many of the S&P/TSX subindexes are down this year. The most notable exception is the Capped Energy Index (+44 per cent as of the close on May 12).

What’s an income investor to do in this situation? My advice is to focus on cash flow, not share prices. Here are some suggestions.

Energy

Many conventional energy companies have raised their dividends in response to the rapid rise in the price of oil. Suncor Energy Inc. (TSX, NYSE: SU) doubled its quarterly payout to $0.42 a share effective with the December payment, and then raised it again this month to $0.47 ($1.88 annually). It yields 4 per cent at the current price. Freehold Royalties Ltd. (TSX: FRU) has boosted its monthly dividend three times since last July. It currently pays $0.08 per share ($0.96 annually) to yield 6.6 per cent.

These are very attractive yields. The problem is they aren’t dependable. Many conventional oil companies, including the two just mentioned, slashed their dividends when oil prices plunged a couple of years ago. Freehold paid only $0.015 per month for most of 2020. Suncor cut its dividend by 55 per cent when the pandemic drove down oil prices. If you’re relying on cash flow from your investments to fund your lifestyle, these are nervous choices.

Utilities

The Capped Utilities Index is up only 0.77 per cent so far this year, but it represents safer ground for income investors. Utility stocks generally offer a decent yield, with little chance of a dividend cut. The trade-off is that capital gains potential is limited, but that’s a small price to pay for income security.

We have several utilities on my Income Investor recommended list including Fortis Inc. (TSX, NYSE: FTS), which is currently yielding 3.3 per cent, Canadian Utilities Ltd. (TSX: CU), which pays 4.6 per cent, Capital Power Corp. (TSX: CPX), with a yield of 5.2 per cent, and Emera Inc. (TSX: EMA), paying 4.3 per cent. These should be your first choice for a conservative, low-risk portfolio.

Communications

This sector has performed well so far in 2022, up 5.1 per cent for the year. As with utilities, these stocks offer decent yields and the likelihood of any dividend cuts is remote, even if we slide into a recession.

The flagship recommendation here is BCE Inc. (TSX, NYSE: BCE), which recently raised its quarterly dividend by about 5 per cent to $0.92 ($3.68 a year). The current yield is 5.4 per cent. I also like Telus Corp. (TSX: T, NYSE: TU), which currently yields 4.1 per cent.

Pipelines

There is no specific pipelines sub-index but if there were it would be performing well. Enbridge Inc. (TSX, NYSE: ENB) is up 13.5 per cent so far this year and is paying a quarterly dividend of $0.86 a share ($3.44 a year) to yield 6.1 per cent. TC Energy Corp. (TSX, NYSE: TRP) has gained 15.5 per cent year to date and pays a quarterly dividend of $0.90 ($3.60 a year) for a yield of 5.3 per cent. Pembina Pipeline Corp. (TSX: PPL, NYSE: PBA) has seen its stock rise 26.7 per cent this year. It pays a monthly dividend of $0.21 ($2.52 a year), to yield 5.2 per cent.

Banks

The Capped Financials Index is off 9.36 per cent for the year, but some individual stocks in the sector are doing better. My recommendation of Bank of Montreal (TSX, NYSE: BMO) has lost about 3 per cent this year but recently raised its dividend by 25 per cent to $1.33 per quarter ($5.32 a year) to yield 4 per cent.

Rising interest rates are favourable to banks because they increase net interest margins (NIM), the difference between what banks pay to depositors and what they charge borrowers. It’s unlikely we will see any dividend cuts in this sector, in fact there may be more increases.

To sum up, the coming months are likely to see significant market turbulence. Stock prices may fall farther than anyone expects. Focus on secure dividend-paying stocks and avoid those with a record of cutting their payments in bad times, like the conventional energy sector.

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca.

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