To put this theory to the test, I put together a portfolio consisting of the best dividend growers in Canada. The reason I chose the dividend growers over simply dividend payers is because the former companies tend to exhibit better balance sheets and financial discipline over the latter.

For example, in a study done by Ned Davis Research, dividend growers and initiators on the S&P500 returned an annualized 12.9% with a standard deviation of 15.6% between 1972 to 2019, while companies who kept their dividends the same or cut their payouts exhibited returns of 11.9% and 10.9% at standard deviations of 18% and 24%, respectively (a lower standard deviation implies lower volatility).

A similar study conducted by RBC Global Asset Management pointed to the same outcome: dividend growers returned 11% annualized from 1986 to 2019 compared to 9.2% for the payers and just 1.6% for the cutters. Moreover, dividends have proven to be a significant contributor of overall equity returns, with dividend reinvested returns on the TSX almost four times greater than dividend-excluded returns from 1976 to 2019.

Given the importance of dividends — particularly companies that focus on sustainably growing said dividends — I created a classic 60/40 portfolio with the 60% equity component consisting of the top six Canadian dividend names.

To keep things simple, six equity holdings were divided equally (10% each). The companies selected were all household names: Canadian National Railway, Fortis, Enbridge, Royal Bank, Saputo, and BCE.

All six of the chosen companies have exhibited strong balance sheet discipline and dividend growth; for example, BCE has increased its dividend by 128% since Q4 of 2008, while keeping its payout ratio within a manageable 65-75% of free cash flows.

The remaining 40% of the portfolio was evenly split between plain-vanilla passive Canadian and U.S. passive bond funds. The test period spanned from January 2, 2008 until April 30, 2020, which would mean our hypothetical portfolio captured the worst of the 2008 recession, the 2016 and 2018 selloffs, and, of course, the recent bear market plunge.

The results: despite the unlucky timing, it seems patience has paid off once again. The hypothetical portfolio returned an annualized 10.4% at a standard deviation of 7%, crushing passive-index funds, which track the TSX and the currency hedged S&P 500 (4% and 7% annualized at 14% and 16% standard deviation, respectively, across the test period).

Finally, to ensure that the outperformance was due to security selection, I compared the dividend portfolio to one in which the equity component consisted of just a single passive ETF tracking the TSX, while keeping the bond allocation the same. Sure enough, this passive 60/40 portfolio returned only 6% across the test period, with a similar level of volatility, also underperforming the dividend portfolio.

In conclusion, it pays to buy dividend growers, as these names, by nature, are some of the most well-run companies in Canada. Even in our simple experiment consisting of just six stock holdings and two bond funds, we managed to outperform the indices thanks to superior security selection.

So, even if you are hesitant about investing here, bear in mind that a portfolio consisting of the best dividend growers in Canada exhibit strong durability in the face of prolonged market downturns and will reward you for your patience.

The post Worried About a Bear Market? Here’s How You’d Have Fared if You’d Bought Canada’s Top Dividend Growers During 2008 appeared first on The Motley Fool Canada.

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People will need a place to live

Even in a recession, Canadians need a place to live. One way to get defensive exposure to the housing sector is via a multi-family REIT.

While much of the REIT sector has been heavily sold off, with retail and hotel names leading the declines, multi-family operators have fared much better thanks to their inherent stability.

One name that stands out is Canadian Apartment Properties REIT (TSX:CAR.UN), Canada’s largest multi-family landlord, with a diverse portfolio spanning our country as well as parts of Europe.

Aside from its size and diversification, CAPREIT also boasts a 98% overall portfolio occupancy, as well as debt to gross book value of just 35%.

This means that liquidity should not be a concern for the REIT during times of trouble, especially as over 98% of its mortgages are backed by the CMHC, and lenders will be more than happy to refinance their mortgages as they become due.

More info on CAPREIT can be found here

Stock up for the long haul with grocers

Consumer staples are another hallmark of a defensive portfolio. If you’ve ever shopped for groceries, chances are you’ve visited a store under the Loblaw Companies’ (TSX:L) umbrella. As the largest Canadian food retailer, Loblaws is the parent company of such ubiquitous brands like Superstore, Shoppers Drug Mart, T&T and Independent.

Despite its size, Loblaw is by no means stagnant. For its last fiscal year, food retail same-stores growth of 1.1%, and drug retail same-stores growth of 3.6%. While the pharmacy segment exhibited faster growth, food retail should catch up, as Canadians rush to stock up on bulk purchases.

Furthermore, with 2019 free cash flows of $1.2 billion, Loblaws has ample funds remaining after capex to pay out its dividend.

More info on Loblaws can be found here.

Heat and water

Finally, no defensive portfolio would be complete without a utility name. Luckily, here in Canada, we have no shortage of high yielding, stable names with strong protective moats. Fortis Inc (TSX:FTS)(NYSE:FTS) is one such company, with an enviable track record of 46 consecutive annual dividend increases.

Fortis is able to fund such returns to shareholders thanks to its well protected $28 billion rate base, which serves over 3.3 million customers across Canada and the United States. Furthermore, Fortis has ample liquidity to weather the economic downturn.

Debt maturities for 2020 total less than $500 million, and an undrawn $4.3 billion credit facility provides a safety net in the unlikely event the company’s cash flows are not enough to meet its obligations.

For more on Fortis, visit this link.

The bottom line

No one has any idea as to how long this economic downturn will last. Instead of trying to time the market, investors are better served to beef up their portfolios with defensive names.

The three companies in this article have held up very well during the selloff and offer portfolio protection along with stable dividends to weather this downturn.

The post How to Recession-Proof Your Portfolio appeared first on The Motley Fool Canada.

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With stocks at fire-sale prices, despite the past two days’ rally, here’s a chance to get some ESG names at great discounts.

Carbon reductions are the forefront of economic policies

The world’s most populous regions have embraced greener policies. For example, the E.U. has set a goal of reducing greenhouse gas emissions by 40% in 2030 and is currently on track to exceed that target. Moreover, the E.U. has also targeted 32% of electrical production to come from renewable sources during the same period.

China, while off to a slower start, has targeted 2030 to be the year in which CO2 emissions are set to peak, while non-fossil fuel sources will power 20% of the country.

India, a shining star, is on track to achieve 60-65% of its power generation to come from non-fossil sources and is set to reduce its emissions intensity as a share of GDP, below the 33-35% below the level set in 2005.

These shifting policies toward green power have led to a surge in renewable electricity production. In 2018, renewable sources account for 6,700 terawatts of global power, up from 2,800 terawatts the decade before.

Investors have taken notice

The drive to modernize power generation has caught the attention of investors. From an economic perspective, it makes little sense to rely on coal power generation when it’s already cheaper to generate electricity from renewable sources.

According to data from CarbonTracker, over 60% of global coal power plants are generating electricity at higher cost than it could be produced by building new renewables. By 2030, it will be cheaper to build new wind or solar capacity than to continue operating coal in all markets. Furthermore, since coal plants take on average 15 to 20 years to recoup their costs, the 499 gigawatts of coal generation planned worldwide will inevitably lead to a loss of $600 billion for investors.

Based on these underlying metrics, investors and fund managers are increasingly turning to ESG and away from fossil fuel investing. According to Morningstar, 2019 saw ESG funds record net inflows of $20.6 billion, up four times from the numbers just four years prior.

Brookfield Renewable Partners: One of the best names in the sector

Given where we are, ESG will be a bullish theme for years to come. As the trends are extremely favourable towards this style of investing, stocks with an ESG image will benefit from continued buying pressure from investors and fund managers. One name that stands out is Brookfield Renewable Partners (TSX:BEP.UN)(NYSE:BEP). It is a favourite among income investors, thanks to its 6% annualized dividend-growth rate since 2012.

Furthermore, Brookfield benefits from an investment grade balance sheet (rated BBB+) and a geographically diverse footprint of renewable assets across North & South America, Europe, and Asia.

Currently, the portfolio can generate 18.3 thousand megawatts of renewable power, which results in a reduction of 27 million tonnes of CO2 emissions worldwide. With the Brookfield brand behind it, this power generator is one of the best bets to play the long-term growth of ESG.

The post Use the Sell-off to Invest in a Greener Future With ESG appeared first on The Motley Fool Canada.

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Avoid hotels…

Hotel occupancy rates have plummeted, as tourism and travel grind to a halt. According to Smith Travel Research, hotel occupancy in the U.S. has plummeted 56% year over year to 30.3% nationwide. Average daily rates have also fallen in the same time span, to $93.41 per room, down from $134, while revenues from available rooms (RevPAR) are down 70%, over the same time frame. These declines in RevPAR are so unprecedented, in fact, that they’ve surpassed the lows set after 9/11 and the 2008 financial crisis.

…and retail

Retail is not faring much better. Data from OpenTable show that restaurant reservations have fallen off a cliff, with 100% declines in reservations across all the major markets the site operates in. Shopping malls and brick-and-mortar stores, which have long been experiencing slowing foot traffic, are closing en masse across Canada as part of widespread social-distancing measures. Even before the outbreak of the coronavirus, 2020 had already claimed its share retail victims, such as Pier 1 Imports, which filed for bankruptcy in February.

It’s all about liquidity

It goes without saying that expectations must be tempered, and investors should not expect much growth from any REIT name in the next few months. The coming days are going to be all about survival, and the REITs with the least amount of debt and near-term mortgage maturities on the balance sheet, large amounts of unencumbered assets, which can be sold off to raise cash, and available credit facilities will be the only ones left standing with their dividends intact.

Stick to pure plays

I’ve never been a fan of the diversified REITs, as the laggards in the portfolio tend to drag down the leaders. Furthermore, liquidity commitments for diversified names can be quite cumbersome due to the diverse array of projects the REIT must undertake to propel growth. Alternatively, I like pure-play names due to the specialized expertise of the management in their sectors and the more concentrated exposure, which is then diversified across a larger geographic footprint.

Based on these criteria, a great defensive play would be Canadian Apartment Properties REIT (TSX:CAR.UN), which happens to be our largest multi-family operator with a geographically expansive portfolio across Canada, the Netherlands, and Ireland. For fiscal year 2019, CAPREIT reported strong operating metrics, which included overall occupancy of 98.2%. More importantly, CAPREIT’s near-term mortgage maturities are only around $300 million when combined with a debt-to-gross-book-value ratio of 35% and cash plus undrawn credit facilities of $623.5 million, which ensures it has ample liquidity. Note also that 98.3% of CAPREIT’s mortgages are backed by the CMHC, which means that lenders will be readily available to refinance the REIT’s mortgages as needed.

The bottom line

Not all REITs are equal and given that we could be in for protracted downturn, it pays to be picky when it comes to this sector. Given, the recent selling, all REITs appear to be cheap, but only a few present actual value. One such name is CAPREIT.

The post Income Investors: How to Pick the Right REIT appeared first on The Motley Fool Canada.

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Come for the dividend, stay for the growth

Telus might be a telecom, but it’s anything but boring. It boasts almost 20 years of consistent dividend raises and a payout that survived the 2008 recession intact.

Based on its last conference call, Telus has targeted a 2020 payout ratio of 65% to 75% of free cash flows, expected to come in the $1.4 billion to $1.7 billion range. Even if we take the low end of the guidance, the free cash flow should cover the majority of the payout. The remainder could come from the $1.2 billion undrawn portion of the credit facility, should the need arise.

But it’s not just the dividend that is interesting. For a legacy telecom, Telus has a few tricks up its sleeve to address competitive concerns. For example, in March of last year, Telus launched Babylon on its TELUS Health platform. Babylon is a virtual health care solution that provides access to doctors and health care information through a smartphone app.

Recently Telus also closed two acquisitions that are expected to be accretive. The first, Competence Call Center, is a call centre solutions provider with 8,500 employees across 22 European locations. The deal is expected to contribute to Telus’s international EBITDA. The second is the Canadian operations of ADT, a leading security services provider. The service will be rolled out as part of a bundled offering, along with cable and internet.

A few risks worth addressing

While the acquisitions will certainly help with customer retention and additions, it is worth mentioning that Telus is not immune to economic risks. Telecoms, like all businesses, are dependent on strong economic metrics, especially pertaining to their wireline revenues. Telus is no exception. It is heavily dependent on GDP growth, housing starts, and low unemployment to boost net additions.

As the company is heavily exposed to Alberta, more so than its competitors, the economic shock could have a deeper impact to Telus’s bottom line than for its peers. Furthermore, given the government’s mandate to reduce certain wireless plan rates by 25% in Canada by 2022, Telus will have to be increasingly creative with its pricing structure and incentives to keep its churn low. Finally, while Telus is a serial dividend grower, its elevated leverage of $18.2 billion in net debt, or 3.2 times 2019 EBITDA, could be a point of concern.

The bottom line

Telus is addressing its risks in several ways. For example, the ramp up of TELUS Health and instalment plans like TELUS Easy Payments will help with net additions and keep retention rates up in the face of heightened competition. While the oil shock will certainly hurt Alberta’s economy, Telus is continuing to diversify through an increasingly international footprint, while also leveraging ADT as part of bundled home internet and cable solutions.

And finally, Telus’s recently closed, and over-subscribed, $1.5 billion bought deal will help alleviate debt concerns.  Lower capex spending of $2.75 billion, versus $2.9 billion in 2019, will ensure there’s plenty of cash to go around.

Telus may not be perfectly recession proof, but given these strengths it can certainly withstand a downturn and come out with its dividend intact.

The post Can Telus (TSX:T) Withstand a Recession? appeared first on The Motley Fool Canada.

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Given the low share price, Suncor’s dividend is yielding almost 12%, the highest it has ever been. I believe the current low share price is an overreaction. Thanks to a strong balance sheet and an integrated model, Suncor has the resources to survive a prolonged bear market in oil.

Strong balance sheet and liquidity   

Suncor has one of the most enviable balance sheets in the oil patch. At the end of 2019, Suncor had $6.7 billion in liquidity on hand, with $2 billion of cash and equivalents and additional credit lines of $4.7 billion. Furthermore, the company has no debt maturing in 2020. It has only $2.6 billion of debt to mature in a staggered fashion between 2021 and 2024.

Cash draws from major projects such as Fort Hill and Hebron are also nil, as they have now reached completion. That said, I believe a lot of the market’s apprehension is because Suncor’s capital budget is based on a break-even $45/bbl for West Texas Intermediate crude. Given that oil is now 33% below this figure, investors are beginning to wonder whether Suncor’s dividend is sustainable.

There are three points I want to bring up relating to this issue. One, capital budgets are flexible. Suncor has shown that it can successfully navigate a $30/bbl world. After all, we have visited these levels before, in 2016.

Secondly, Suncor currently has an aggressive share buyback program that, when combined with its dividend, has delivered shareholder returns of $9 per share between 2017 and 2019. If faced with the prospects of a prolonged oil downturn, Suncor can simply suspend its buyback program to keep the dividend.

In fact, it did just that when oil prices crashed in 2016. The company generated just $6 billion of funds from operations in that fiscal year. Given that its sustaining capital expenditures are budgeted at $3.3 billion for 2020, I don’t believe a cut is on the table.

Finally, it bears repeating that Suncor is an integrated energy company and is hedged against low oil. With 460 thousand barrels a day of refined products, and 97% refinery utilization rates, Suncor is able to realize global pricing and outperform its downstream peers.

The bottom line

With $30 to $40 per barrel oil setting up to be the new normal, and investors attempting to reconcile fundamentals and a deteriorating commodity backdrop, Canadian oil names have been sold off en masse. Despite the bearish overhang, the sell-off has presented buying opportunities in some of Canada’s best energy names. One such company is Suncor, which boasts an excellent balance sheet and a refinery hedge against low oil prices.

With 18 years of solid dividend history, Suncor’s value proposition is hard to ignore.

The post Market Crash: Can Suncor (TSX:SU) Survive on $30 Oil? appeared first on The Motley Fool Canada.

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Better balance sheet

However, the Air Canada of today has a much stronger balance sheet than it did 16 years ago. At the end of Q4, Air Canada had almost $6 billion in cash, as well as undrawn credit lines of $7.4 billion. Net debt (debt minus cash) was just 78% of 2019 EBITDA, while free cash flows for the year came in at $2 billion, up from $1.3 billion the year prior. In terms of its pension, Air Canada was in a surplus position of $2.5 billion as of January 1, 2019, though we can expect this to decrease once it gets revalued later this year owing to lower interest rates.

Fleet flexibility

The Air Canada of today also boasts increased flexibility in terms of its capacity and has not been locked into messy supplier contracts or cumbersome leases. Currently the airline’s 89 aircraft can all be shelved as demand decreases to weather a protracted downturn. Furthermore, if history is any indication, air travel tends to rebound dramatically after a major shock. For example, within two years after 9/11, air travel had rebounded completely to previous levels. With Air Canada set to suspend international flights after March 31, we can anticipate a surge in demand, and an almost V-shaped recovery once COVID-19 has been beaten.

Fuel prices are at lows

Finally, the low oil price will add an incremental tailwind for Air Canada, as fuel and labour are the two biggest expenses for any airline. According to the International Air Transport Association (IATA), jet fuel prices have fallen by 49% in North America compared to a year ago.

The bottom line

I previously wrote that AC was a stock that I would avoid during this market downturn. While I’m still cautious around this name, each further decrease in the share price of this company increases the risk-to-reward ratio. Make no mistake about it, the Air Canada of today is drastically different than from years past and has more resources than ever to weather a downturn.

Moreover, time is on its side, as data from the IATA estimate the airline industry is facing an unprecedented loss of $113 billion in passenger revenues. Therefore, with each passing day, there is increased pressure on governments to support the travel industry. Given these facts, I have little doubt an aid package will be presented by the Federal government in the coming days that will alleviate the liquidity strain on Air Canada.  In the meantime, Air Canada is well equipped to handle this recent bout of turbulence.

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Inter Pipeline

Even before the selling picked up steam, Inter Pipeline (TSX:IPL) was already paying out a yield north of 7%. Now, two months later, the stock is trading at 2008 prices with a monthly dividend of $0.1425 — an annualized yield of 29%!

History has shown that payouts this large do not last, as companies will often cut or suspend such a cumbersome use of precious cash flow. This case is no exception for three primary reasons.

Firstly, IPL is heavily exposed to commodity pricing in its natural gas business segment, translating to 13% of 2019 company-wide EBITDA. With natural gas trading in the $2 range, while propane continues to trend downward due to chronic oversupply, IPL’s margins on the processing of natural gas to natural gas liquids continues to deteriorate, and with it, its free cash flow generation.

Secondly, natural gas is not the only commodity headwind the company is facing. As we all know, the bloodbath in oil continues, with Western Canadian Select trading at all-time lows of about $11 per barrel as of writing.

The reason why even a transporter like IPL will feel the strain of rock-bottom oil prices is because most the company’s pipeline contracts are renewed every 30 days (or less). With oil at an unsustainable level, and Alberta’s production limit to be extended to December of this year, IPL faces a very high level of counterparty risk and loss of those precious pipeline contracts.

With pipelines responsible for $168 million out of $873 million in total funds from operations, cash from this segment is critical to the viability of its dividend.

Finally, IPL’s crown jewel is its $3.5 billion Heartland Petrochemical project, which will be IPL’s hedge against the previously mentioned multi-year-low propane prices. Once buildout is complete, IPL hopes to use the facility to convert propane into polypropylene — a polymer found in clothing materials, medical products, and plastics.

For IPL, Heartland is an all-hands-on-deck project and will deliver $450-$500 million in annual EBITDA upon completion in 2021. Given the importance of Heartland on IPL’s capital budgeting decisions, it’s easy to surmise that the board will choose it over sustaining the dividend, particularly as IPL’s debt remains at a lofty six times its 2019 EBITDA.

The bottom line

Don’t be fooled by the giant yield and stay away from IPL until there is better clarity on the direction of oil prices or once the dividend has been shed. Given the current industry backdrop, it is not in the best interests of the company nor its shareholders to keep such an unsustainable cash burden. There are safer dividend names to choose.

The post Dividend Investors: Run, Don’t Walk, Away From This 29%-Yielding Energy Name appeared first on The Motley Fool Canada.

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Last quarter might have been the last hurrah

In their latest earnings reports, the major banks reported strong earnings thanks mostly to revenues from their capital markets divisions. For example, CIBC (TSX:CM)(NYSE:CM) reported a gain of 63% year over year in capital markets net income, while the personal and commercial banking segment earnings came 2% below last year’s due to higher spending on strategic initiatives.

While strong numbers should be applauded, not all “beats” are equal, and I would have liked to see healthy earnings that reflected more on core businesses rather than capital markets, as the latter segment’s revenues have proven to be extremely cyclical (during the 2008 financial crisis, CIBC’s capital markets division saw its revenues fall 40% year over year).

Further, the weakness in core business lines might get worse in the coming quarters thanks to increasing credit losses. In its January report, the Office of the Superintendent of Bankruptcy in Canada reported that Canada wide consumer insolvencies (both bankruptcies and consumer proposals) grew by 9.7% compared to the previous month, and 10.4% over the previous year, while business insolvencies also gained by 2.5% during the same period. Just how bad can insolvencies truly get once unemployment picks up during a recession?

The second headwind that the Canadian banks are facing is deterioration of their net interest margins (NIMs). This is because the banks tend to borrow on the short end of the yield curve while lending at the long end and netting the spread. After the recent 50-basis-point cut by the Bank of Canada, yields on 10-year bonds have nose dived to .97% as of writing.

While this is already a dismal picture for forward NIMs, it’s most likely going to get even worse, as oil prices have also cratered thanks to a price war between Saudi Arabia and Russia. Currently, West Texas Intermediate crude is trading below $30 per barrel, signaling an oil bear market, which will increase pressure on the Bank of Canada to further cut Canada’s benchmark interest rate.

The bottom line

Canada’s banks have fallen 20% of their highs, but the pain is far from over. Thanks to shocks to the Canadian economy and further central bank emergency monetary policies, we might well see increases in loan losses and compression of NIMs for Canada’s Big Six banks, leading to further shedding of their stock prices.

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Despite the noise, stocks are still the best way to save for retirement

If you’re young, time is on your side. Without a need to rely on your portfolio as a source of income, you can readily start moving into the market and slowly dollar-cost average your way down. That means buying little bits at a time and accumulating a large position over time. As of writing, most stock indices are trading in bear market territory, and given the velocity of the recent selling, they are more than overdue for a bounce.

To put things into perspective, if you had bought stocks each of time the markets sold off 20%, here’s how you would have fared. In December of 2018, the TSX was trading at 13,770, down from 16,600. By January of 2020, it had 17,930, or a gain of 30% from the trough.

During 2008 — one of the worst financial crises the world had ever faced — the TSX fell from 14,800 to the 8,000 level, or a 46% drawdown. If you had bought it after a 20% selloff in the 11,800 range, you would have been 10 months early from the bottom, yet just two-and-a-half years later, the TSX returned above the 14,000 level.

In other words, stocks tend to go up over time. The world’s economy also tends to go up over time due to greater productivity, capital spending, education spending, healthcare, and, of course, technological advancements. Monetary and fiscal policy tools have advanced, and our understanding of market corrections and their remedies have also increased.

Another example can be found south of the border with the S&P500. If you had started with $10,000 in March of 2008 and invested just $100 every month, by March of this year, you would have annualized a return of 8.7% over the past 12 years — trouncing bonds and cash.

So, I guess the next decision is determining the assets to buy, since everything seems to be on sale.

I would focus on stable blue chips that have proven to survive through multiple financial and economic crises. A name that should be everyone’s watch list is Restaurant Brands International (TSX:QSR)(NYSE:QSR), one of the world’s largest quick-service restaurant operators with over 24,000 restaurants across the globe.

As of writing, QSR’s stock is trading 43% below its all-time highs, but that’s not the only thing that’s appetizing about this name; QSR is also the parent company of brands like Tim Hortons, Burger, King and Popeyes, which obviously need no introduction. With an excellent balance sheet and staying power, QSR is a company that has outlasted many market downturns and will continue to do so into the future.

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