U.S. News

RPT-BAY STREET-Dividends offer security in a turbulent market


By John McCrank TORONTO, May 9 (Reuters) - Do your homework, pick your stocks, reinvest the dividends, and wait. That's the yawn-inducing advice of market pros who recommend a long-term investment strategy focused on high quality, dividend-paying blue chips. "It's worse than watching paint dry," said Doug Warwick, portfolio manager of the C$4.2 billion ($4 billion) TD Dividend Growth Fund. But with all the recent market turmoil, including Thursday's 1,000-point freefall on the the Dow, dividend stocks could hold more appeal than ever. "At times like this when the market enters a renewed phase of uncertainty, those stocks become really attractive, because they offer stable cash flows and the dividend essentially acts as a cushion against a sharp downside," said Elvis Picardo, an analyst and strategist at Global Securities in Vancouver. When the market was surging from last year until quite recently, he said, investors favored so-called "high beta" stocks, or those that rise the most when the market is rocketing upward. "Now that things have turned, you might see a renewed appetite for some of these defensive names," Picardo said. He said he likes media companies Shaw Communications and Telus, as well as energy player TransAlta , for their consistent dividend hikes. Dividends can provide a major source of reliable returns. Warwick said the compounding effect of growing, reinvested dividends can represent as much as 75 percent of an investor's returns over time. POST-RECESSION DIVIDEND HIKES ABOUND A spate of fresh dividend increases and reinstatements has also attracted investors. Telus surprised the market on Wednesday with an increase, while auto parts maker Magna International Inc reinstated its dividend on Thursday. Miner Teck Resources recently did the same. "There were many companies like Teck which had very serious balance sheet concerns during the credit crisis," said Lieh Wang, manager of the C$850-million Empire Dividend Growth Fund. "Now that we've come out of the recession, many of these same companies are in much better financial condition and so they can now look forward to either reinitiating a dividend, increasing their dividend, doing share buybacks, or making acquisitions." Wang said he looks to invest in stable businesses that have strong records of increasing their dividends, even if their yields have not been very high. "These types of companies, which have increased their dividends consistently over time, have also proven to be outperformers," Wang said. He pointed to food retailer Metro Inc and Canada's biggest railroad, Canadian National Railway, as good examples of companies that have strong equity returns on top of their dividends. DIVIDEND GROWTH CAN POINT TO EARNINGS GROWTH Typically, though not always, dividend increases are a foreshadowing of earnings increases, and if earnings are increasing, the stock price may also rise, said Anil Tahiliani, head of research at McLean & Partners Wealth Management Ltd, in Calgary. "Growing dividends is kind of like giving future guidance that earnings are likely to be growing for the company, so the company feels comfortable enough to make a long-term commitment to increase their dividend," he said. "So that's typically a future indicator that the business is doing well and that management sees a good 12 to 24 months ahead." Tahiliani said a couple of dividend-paying stocks with good track records that he likes are methanol supplier Methanex and pipeline company ShawCor Ltd. Canada's big banks -- Royal Bank of Canada, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce, and Toronto-Dominion Bank -- have had a stellar records of increasing dividends. Banks make up the lion's share of the funds run by both TD's Warwick and Empire's Wang, however both managers said the regulatory uncertainty surrounding new capital requirements for financial institutions means banks are unlikely to increase their dividends until next year. Wang said he thinks it is important for investors of all ages and risk profiles to be focused on dividend-paying stocks because over the long term, dividends and their reinvestment are the main drivers of returns. "If you are a long-term investor and you want a less turbulent ride, but be well rewarded at the end of that ride, then definitely, look for those companies that not only pay a sustainable dividend, but that look to have potential to be increasing their dividends over time," he said. ($1=$1.04 Canadan) (Editing by Frank McGurty) Keywords: COLUMN CANADA MARKETS (john.mccrank@thomsonreuters.com; +1 416 941 8083; Reuters Messaging: john.mccrank.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved.

The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.