Income investors have seen some of their favourite dividend stocks take a serious beating in the past month. This is especially true for holders of energy companies.
While nobody likes to see 15% of their equity get wiped out in a matter of a few weeks, stocks are pretty much the only place an income investor can get yield right now. Savings accounts, GICs, and government bonds look like safe options to protect capital, but interest rates are so low that you may actually lose money when you take taxes and inflation into account.
So, where can retirees get adequate distributions to supplement their pension income without taking on too much risk? In the current environment, the task is a challenging one.
Given the recent volatility in the market, I think new income investors should consider BCE Inc. (TSX: BCE)(NYSE: BCE), The Bank of Nova Scotia (TSX: BNS)(NYSE: BNS) and Fortis Inc. (TSX: FTS).
Let’s take a look at all three companies.
BCE Inc.
Canada’s largest communications company is a great choice in the current environment.
In the past two years BCE made two important acquisitions. The purchase of Astral Media in 2013 for $3.4 billion instantly gave BCE a dominant position Quebec’s pay TV market. Recently, BCE spent another $4 billion to privatize its Bell Aliant subsidiary.
Investors in BCE already receive a generous 5.2% dividend of $2.48 per share. As BCE continues to realize synergies from Astral and integrates Bell Aliant, a healthy part of the additional cash flow should end up in the hands of BCE’s shareholders.
Some pundits worry that a new national competitor will emerge in the Canadian telecommunications market. I don’t see it happening soon, and BCE is now diversified enough that it will continue to grow even if a new wireless entrant arrives.
The Bank of Nova Scotia
You might think that a bank is not the best pick right now given the concerns around the Canadian housing market. A hard landing will definitely hit earnings, but the Canadian banks are prepared for the worst, and investors should still hold at least one bank as part of a diversified portfolio.
I picked The Bank of Nova Scotia because I think it offers both the lowest risk and best value in the sector right now.
The Bank of Nova Scotia finished the last quarter with a Basel III CET1 ratio of 10.9%, the strongest among the five largest Canadian banks. The ratio is a measure of the bank’s financial stability.
The company has significant international operations, specifically in Mexico, Colombia, Peru, and Chile. The focus on Latin America offers great long-term growth potential as well as earnings diversification in the event that the Canadian retail market hits a rough patch. As economic development improves, the young people in these countries are demanding credit cards, mortgages, lines of credit, and investment products.
The Bank of Nova Scotia currently trades at 11.3 times earnings, a sizeable discount to its peers. The company pays a dividend of $2.64 per share that yields 4%.
Fortis Inc.
Telecom companies might be boring, but electricity producers will put you to sleep. In this volatile environment, that’s exactly what an income investor is looking for. Fortis owns and operates power-generation facilities in Canada, the U.S., Central America, and the Carribbean.
The company recently announced a deal to buy UNS Energy Corp., an Arizona-based utility. The $4.5 billion deal is great news for investors because it will add significant cash flow starting in 2015.
Fortis pays a dividend of $1.28 per share that yields 3.7%.
