Yahoo Finance Battered dividend stocks may be buying opportunity for investors
For the first time in years, TD investment advisor Michael Currie is hearing from clients concerned about what he says has been "a bit of a sacred cow" among Canadian investors.
"I've had many conversations with clients, especially older ones, who are saying, 'Why am I sitting on these dividend-paying stocks making four, 4.5 per cent, watching them go up and down but mostly down, when I can buy a bond or GIC at five per cent and I'm guaranteed?'" Currie said in an interview with Yahoo Finance Canada.
Dividend stocks have outperformed the TSX over the years, but that changed in 2023 in the wake of rising interest rates. The S&P/TSX Canadian Dividend Aristocrats Index, which tracks TSX-listed companies with a market cap of at least $300 million and which have dividends that have increased for at least five consecutive years, is down nearly 6 per cent this year. The TSX, meanwhile, is down about 2 per cent year-to-date.
"We've seen a real switch in the market and so it's a bit painful for dividend investors," Currie said.
Scotiabank GBM analysts note that the rise in bond yields "has exerted downward pressure on defensive and interest-sensitive sectors, which tend to be the go-to sectors for income."
"For instance, TSX Financials, Communication, Utilities, and Real Estate are expected to generate 55% of the TSX total dividend pool this year, but they’re all performing poorly so far," the analysts wrote.
Why dividend stocks are having a challenging year
For decades, lower interest rates and lower yields have made dividend-paying stocks more attractive, says Craig Basinger, chief market strategist at Purpose Investments. But the market has shifted. Basinger says the biggest impact on dividend-paying stocks over the last several months has been higher bond yields.
"The fact is if the five-year bond yield moves higher, then your dividend-paying companies have to compete with it. You're seeing dividend companies now being required to yield more to remain competitive, and the only way for them to do that is for their price to fall," Basinger said.
Yields at some dividend-paying stocks have soared. According to a Purpose Investments report by Basinger, about 20 per cent of TSX companies carry a yield of more than 5 per cent, up from just 8 per cent two years ago, before central banks began to aggressive hike interest rates to tame inflation.
"To put it bluntly, higher bond yields have resulted in price declines for many dividend payers, which has helped lift dividend yields," Basinger wrote.
"So, dividend-paying companies are now paying more to remain competitive with higher bond yields."
Currie says the decline "is all a factor of interest rates."
Dividend investors: Do not panic, and be strategic
Currie said that there are "certainly some opportunity to buy the dips" when it comes to dividend stocks.
"I do want to stress that a lot of these blue chip, dividend-paying stocks, there's nothing wrong with these companies and most of them are doing very well," Currie said. He noted that the utility sector was down 23 per cent in the last year, while telecommunications are down 13 per cent.
"If you're not exposed to those much, I don't think it's a bad time to be getting in."
Currie also said that investors should make sure you are diversified across a broad range of sectors, including growth stocks that tend to have lower or no dividends.
"Most of these companies we're talking about are fundamentally fine... so don't panic, but I would consider some growth names as well," Currie said.
Scotiabank GBM analysts wrote in a research note last week telling investors "don't lose focus: dividend matters."
"Despite a challenging environment, keep in mind that over the long run, dividends matter a lot, accounting for the lion’s share of equity returns," the analysts wrote.
It's also a good opportunity for investors to be strategic when it comes to dividends. Basinger says in the past, it didn't necessarily matter how you were getting dividend exposure in your portfolio, because falling yields made all dividends incrementally more attractive and "lifted all boats in the dividend space."
"We're seeing that the factors driving dividend performance are changing, and I think that's creating an environment where having exposure to different factors becomes important," he said.
"Having more of an active approach when it comes to picking dividends makes more sense, because the rules are going to keep changing as we move from an inflation-scared environment to a perhaps recession-scared environment... All dividends are not the same anymore."
Basinger said Purpose Investments was active this week purchasing pipeline and utilities stocks, sectors that have been hit hard in recent months.
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.
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