Searching for safety

We were sitting around the clubhouse after golf, drinking tea (it used to be beer but everything changes as you get older). The topic of conversation was Europe. The election of a Socialist president in France and the collapse of the Greek coalition had once again roiled world stock markets and everyone was worried.

“I don’t have a clue where to put my money,” one of my friends said, to nods of agreement from the others.

“Dividend-paying stocks,” suggested a retired executive. “They’re safe.”

At that point, everyone looked at me in anticipation. I took a sip of tea and thought about it a moment. “Not necessarily,” I said finally. “There are dividend stocks and dividend stocks. Some are much more risky than others.”

I went on to point out that during the crash of 2008-09, even dividend stocks that had been thought to be rock solid were battered. Canadian banks, none of which was ever in serious trouble, were classic examples. Royal Bank (TSX, NYSE: RY) lost almost half its market value, dropping from over $51 a share in September 2008 to $27 in mid-February 2009. Bank of Montreal (TSX, NYSE: BMO) fared even worse. In May 2007, it was trading at over $71; by February 2009 it was down to $24.66, a loss of about two-thirds of its value. It has never regained its 2007 high. And the banks were thought to be safe!

Dividend stocks in cyclical industries fared even worse. Suncor Energy (TSX, NYSE: SU) plunged from over $70 a share in May 2008 to just over $20 in November, a loss of more than 70 per cent. Teck Resources (TSX: TCK.B, NYSE: TCK) almost dropped out of sight, falling from almost $52 a share in May 2008 to $3.80 in February 2009 — a staggering 93 per cent loss. Yes, there are dividend stocks and dividend stocks.

Not surprisingly, my friends looked somewhat crestfallen after I unloaded all these numbers on them. “So what the heck are we supposed to do?” one of them finally asked.

There are two parts to that answer. The first is to focus on dividend-paying stocks in stable industries — those which are likely to weather any recession with minimal structural damage. The second is to look for industry leaders with a solid franchise, good cash flow, and a strong dividend history.

One sector that has strong defensive characteristics is utilities. These are my top picks in that category.

Fortis Inc. (TSX: FTS, OTC: FRTSF). This St. John’s-based utility has electricity generating operations in five Canadian provinces as well as in two Caribbean countries. It also is the major natural gas distributor in British Columbia, having acquired Terasen Gas several years ago. The company has the longest-history of annual dividend increases of any publicly-traded firm in the country.

Enbridge Inc. (TSX, NYSE: ENB). This is Canada’s largest pipeline company and the main natural gas distributor in Ontario and Quebec. The stock held up well during the crash of 2008-09 and has since rebounded to new all-time highs.

Canadian Utilities (TSX: CU, OTC: CDUAF). An electricity and natural gas distributor operating in Alberta, Canadian Utilities stock set a new all-time high in May, breaking through the $70 mark. It’s the classic example of a “dull” company that keeps on churning out profits for investors.

Another sector that is worth the attention of defensive-minded investors is telecommunications. My favourite Canadian picks here are the following:

BCE Inc. (TSX, NYSE: BCE). BCE’s share price has more than doubled since the collapse of the privatization bid in December 2008 and the company continues to reward investors with dividend increases. The financials are firing on all cylinders; the company recently reported net profits attributable to common shareholders of $574 million ($0.74 per share), up 14.1 per cent from $503 million ($0.67 per share) last year. What’s not to like?

Telus (TSX: T.A, NYSE: TU). The Vancouver-based telecom that became a national player continues to post strong results. Telus recently reported a 4 per cent year-over-year increase in first-quarter revenue to $2.6 billion. The improvement was fuelled by a 6 per cent expansion in wireless and a 2 per cent increase in wireline revenue, mainly due to strong data growth. Net income came in at $348 million ($1.07 per share) representing year-over-year growth of approximately 6 per cent.

Ask a financial advisor if any of these are suitable to your portfolio.

Photo © martin workman

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