4 Great Canadian Dividend Stocks for Your Portfolio - Analyst Blog

Recent indications of no rate hike in the US in the near term should shift focus on dividend-paying stocks. Similarly in Canada, the Bank of Canada had left its key interest rate unchanged last month. However, while in the US investors are busy finding clues for timing the rate hike, in Canada the headlines are about rate cuts.

The central bank’s rosy economic projection last month was termed as “fantasy” by market experts. Many anticipate that the central bank will have to cut rates further. The announcement had come after the Canadian government trimmed the country’s economic growth outlook for 2015 in early April.

However, recent developments suggest a favorable investment scenario, wherein Canadian stocks and the dividend paying ones should see potential gains. The central bank announced several proposed changes yesterday in a bid to inject a substantial amount of liquidity into the markets as a cushion during turmoil.

Further Rate Cuts Ahead?

The Bank of Canada had cut interest rates in January, which was described by bank Governor Stephen Poloz as “insurance” for the “unambiguously negative” impacts of the plunging crude prices. The surprise quarter-point rate cut in January to 0.75% indicated the risks with sky-high household debt. Low interest rate and high employment should negate the ills of high debt levels.

In late March, Poloz said that inflation had declined since the rate cut. He also mentioned that the financial conditions have eased and oil prices stabilized in a range that was “reasonably close” to the bank’s estimates.

As expected in April, the central bank did leave the rates unchanged. However, some experts are of the belief that the central bank might have to bring down rates further. In mid-April, the Bank of Canada had indicated an optimistic outlook for the Canadian economy in the second quarter. After stalling in the first quarter, the central bank projects 2.8% growth in April to July quarter.

However, economist David Madani of Capital Economics termed the bank’s outlook as “pure fantasy.” He wrote: “Eventually the Bank will have no other choice but to cut further.” The rates might be brought down to 0.25%.

Economic Projections

Though the central bank had an optimistic stance on the April-July period, the 2015 growth estimate was dropped to 1.9% from 2.1%. This apart, Canadian government too had trimmed growth projections earlier in April. 2015 projection was down to 2% from previous 2.6% expectations.

However, Canadian consumers are optimistic about the Canadian economy. Bloomberg Nanos Canadian Confidence Index improved from 56.2 to 56.8 recently. This index is based on responses about personal financial health, employment security and economic expectations.

On the other hand, the quarterly business survey of top professional showed economic pessimism to have overtaken optimism. This is the first such instance in three and half years.

The Proposed Changes to Boost Economy

The Bank of Canada proposed several changes yesterday to inject beneficial liquidity into the markets. The central bank is said to have learned about the importance of liquidity in the markets from the experience during the last crisis. Senior deputy governor Carolyn Wilkins said: “A solid economy rests on reliable funding and market liquidity… If we all do our part, a more robust financial system will emerge to the benefit of the people it ultimately serves: businesses and households who save and borrow.”

Wilkins said that the proposed changes vary from letting private investors add more new government bonds from denying bailouts to institutions that “don’t have so-called living wills.”

The proposed changes will avoid trading freezes. They also help in creating funds to buy assets from institutions for up to a month during stress times. Mortgages may be accepted as collateral “as a last resort” on emergency loans. During crisis, the central bank may operate as the lender as a last resort to boost liquidity and to help avoid financial instability. The central bank would also trim the purchase of “benchmark government bonds.”

While analysts looked for rate-related hints from what the central bank had to announce, Wilkins said, “I want to underline that these proposals should not be viewed as clues about current or future monetary policy.”

4 Dividend-Paying Socks to Buy  

The next rate announcement is due on May 27. While it is debatable if the rates will be cut further, adding potential dividend-paying stocks to the portfolio should be a prudent move. These income generating stocks are always a good deal during times of volatility. Poloz had mentioned that the increased volatility may continue.

Canadian dividend-paying stocks also offer tax advantage. Most Canadian firms pay dividends that enjoy the dividend tax credit (DTC). Canadian dividends carry lower tax rate than interest or other income. Separately, Canada’s cyclically adjusted P/E is reportedly at 20, as against 28 for US stocks.

Below we present 4 companies that pay decent dividends and also carry favorable Zacks Ranks.

National Bank of Canada NTIOF provides banking services, including retail, corporate and investment banking. It operates in three business segments, personal and commercial, wealth management and financial markets. In terms of total assets, National Bank of Canada is the seventh-largest bank in Canada.

It increased dividend nine times since 2010, and currently pays quarterly dividend of 50 cents per share. The current dividend yield is at a healthy 4.92%. National Bank of Canada holds a Zacks Rank #2 (Buy). It has a current year forward price to earnings (P/E) ratio of 11.10.

TransAlta Corp. TAC is Canada’s largest non-regulated electric generation and marketing company. On Apr 27, TransAlta declared a quarterly dividend of 18 cents per share on common shares.

The current dividend yield is at a healthy 4.6%. TransAlta holds a Zacks Rank #2 (Buy). It enjoys a current year growth projection of 38.6%, as against industry’s 9.4% estimated growth.

Enerplus Corp. ERF is an oil and gas production company with resources across Western Canada and the United States. Enerplus 's resource plays include shallow gas/coal bed methane, tight gas, crude oil waterfloods, Bakken/Tight oil and oil sands.

Enerplus pays monthly dividend and on Apr 20 it announced a cash dividend of CDN$0.05 per share, payable on May 15. The current dividend yield is 3.85%. Enerplus holds a Zacks Rank #1 (Strong Buy).

Royal Bank of Canada RY operates under the master brand name of RBC. It is the Canada's largest bank as measured by assets and market capitalization, and one of North America's leading diversified financial services companies.

Royal Bank of Canada has hiked dividends for 10 consecutive years. It pays quarterly dividends and announced last month a cash dividend payment of $0.6189 per share, payable on May 22. The current dividend yield is 3.65%. Royal Bank of Canada holds a Zacks Rank #2 (Buy).

The list includes two banking stocks, proving the Canadian banks’ popularity for big payouts. Also, hardly any banks in Canada had cut payouts during the financial crisis. Meanwhile, TransAlta from the Utilities industry is also a favorable option given the fact that Utilities generally render steady performances in all kinds of markets and are rate sensitive.

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