Some stocks have lost a considerable amount of value year to date. A big amount of the losses have to do with higher interest rates that triggered a re-rate of interest rate sensitive stocks to lower valuations. I don’t mean to be doom and gloom, but investors should beware that tax-loss selling could go well into December.
The last day that you can sell a TSX stock at a loss in your non-registered account to offset capital gains for this year is December 27. Remember that you shouldn’t buy or sell the same stock within 30 calendar days of the settlement date of the transaction.
Investors typically execute the tax-loss selling strategy near the end of the year to sell securities at a loss in their non-registered or taxable accounts to offset capital gains, thereby reducing their income tax. As TD Bank noted, “You can also carry back capital losses three preceding years or carry them forward indefinitely.”
In today’s environment, investors may feel more comfortable holding dividend stocks that at least give a return, in the form of dividend income, in a market correction. You would want to seek quality businesses and accumulate shares at good valuations.
The big Canadian banks are good businesses that remain profitable and continue to pay safe dividends through economic cycles. Canadian Imperial Bank of Commerce (TSX:CM) stock has witnessed the weakest price action versus the other Big Six Canadian bank stocks over the last 12 months. It’s down approximately 21% in the period.
From tax-loss selling, the dividend stock could get even cheaper before the new year rolls around. However, despite higher provisions for credit losses in expectation of a higher percentage of bad loans under higher interest rates, CIBC’s lower earnings this fiscal year are still anticipated to cover its dividend. Its payout ratio is estimated to be about 66% of its earnings this fiscal year.
At $48.78 per share at writing, CIBC offers an elevated dividend yield of 7.1%. Assuming economic expansion will ensue, say, in an interest-rate cutting cycle, the stock could revisit the $80 level over the next five years for upside of about 64%. Investors can consider parking some of their long-term capital in CIBC stock to bank on a big dividend.
Brookfield Infrastructure Partners L.P.
Brookfield Infrastructure Partners L.P. (TSX:BIP.UN) is another holding that has declined substantially. It has fallen by about 38% over the last 12 months, bringing its cash distribution yield to almost 6.9%. A pundit on BNN Bloomberg recently noted that rising interest rates have negative impacts on the business. And that a number of projects it is involved in have had cost overruns.
Brookfield Infrastructure is a valid business that can grow in the long run. It has increased its cash distribution every year since it was spun off from its parent company in 2008. BIP.UN’s five-year dividend growth rate is 6.6%.
The utility continues to build a diversified, global portfolio of quality infrastructure assets that generates sustainable cash flows. Going forward, management aims to continue increasing its cash distribution by 5–9% per year. At $30.71 per unit at writing, the utility stock trades at a steep discount of 45% according to the analyst consensus 12-month price target. Don’t expect the stock to come back in a short time, though.
The stock price momentum in CIBC and BIP.UN may experience greater weakness in the short term. However, both should deliver solid long-term returns based on their past results. In the worst-case scenario, investors would need to wait for an interest-rate cutting cycle to push the stock valuations higher.