In a bearish market, many stocks would be falling. For better peace of mind, you can target to buy safe stocks — ones that have decent dividend yields and quality earnings.
Stocks with decent dividend yields
In The Single Best Investment — Creating Wealth with Dividend Growth, author Lowell Miller who was previously the president of Miller/Howard Investments, wrote to target a dividend yield that’s 1.5 times to two times the market’s. The recent distribution yield of the Canadian stock market, using iShares S&P/TSX 60 Index ETF as a proxy, is 3.29%. So, Canadian investors who prioritize dividend investing can target a dividend yield of about 4.9% to 6.6%.
We can further extend this concept that a dividend stock with a lower dividend yield than 4.9% may be more conservative and that a dividend yield of greater than 6.6% may be at higher risk of cutting its dividend.
Earning a sufficiently high yield of 4.9% to 6.6% in the current environment may suggest that the stock is trading at a good valuation. Importantly, this dividend income provides stable returns no matter what stock prices do in the short term.
Debt-heavy utility stocks have declined meaningfully in a higher interest rate environment. For instance, regulated utility stock Emera (TSX:EMA) has fallen about 15% in the last 12 months. It provides shareholder value from its dividend yield of 5.8%, which sits comfortably between the 4.9% and 6.6% range. At $47.42 per share at writing, it also trades at a discount of close to 19% from the 12-month analyst consensus price target.
As a regulated utility that provides essential services, its earnings tend to be resilient through economic cycles. In fact, Emera has increased its dividend for about 16 consecutive years with a five-year dividend-growth rate of 4.7%. Through 2026, management is committed to growing its dividend by 4-5% per year. Assuming no valuation expansion, investors can approximate long-term returns of around 9% per year, which is solid for a blue-chip stock.
What is considered “quality earnings?”
Quality earnings can be resilient earnings or persistently growing earnings — that is, earnings that grow in the long run. Emera’s earnings are pretty resilient. For example, in the last 10 years, its adjusted earnings per share only fell as much as around 10% in two years. In other years, they are growing.
Alimentation Couche-Tard (TSX:ATD) is an excellent example of a business with persistently growing earnings. In the past 10 fiscal years, its adjusted earnings per share increased at a double-digit rate every single year. Needless to say, its total returns have outperformed the Canadian stock market in the last 10 years by about 13.2% per year, delivering annualized returns of roughly 21% per year.
The global convenience store and roadside fuel retailer continues to be a defensive business in a high inflation, high interest rate macro environment. Therefore, investors should consider accumulating shares in a bearish market. At $68.98 per share at writing, analysts believe the stock trades at a discount of approximately 16%. Technically, the stock price momentum is stronger than most TSX stocks.