Hey there, time traveller!
This article was published 24/2/2012 (1614 days ago), so information in it may no longer be current.
Investors have a unique opportunity before them, one I think is closing fast. It starts with interest rates; they are appallingly low, as far as income-seekers are concerned.
But they aren't going up any time soon. The economies of the world are just too fragile, plus inflation is tame (at least the official inflation rate; I sometimes think the numbers are manipulated. Is the cost of living really only rising by two per cent?).
So investors are facing a bleak landscape if they are adamant about putting their money only in fixed-income securities like GICs and bonds. It's tough to survive when you're earning less than the (official) rate of inflation. No one planned to retire on two per cent yields.
So what are these investors going to do? They are going to have to go back into stocks, particularly yielding stocks -- that is, those with decent dividends. The average investor has fled the market. Two massive corrections in a decade -- the tech wreck of 2000 and the financial crisis of 2008 -- are more than enough to make them swear off volatility forever. Unless they don't have a choice.
And I think they don't. We see that in the dividend yields of blue chips. Telus is yielding four per cent. Manitoba Telecom is at 5.2 per cent and dropping (remember that all else being equal, a rising stock price will drive down the yield).
That's not bad, but as these stock prices go up and the yields go down, investors will have to look elsewhere. And where is that? In what I call the orphanage -- the small to medium-size companies that used to be income trusts (in some cases, like real estate, they still are). Some of these companies offer juicy dividend yields of six to 10 per cent. I think these yields will come down as income-starved investors come back to stocks out of necessity. The truth is, many of these businesses are stable and largely immune to the global shocks that buffet the big stock market indices, which are dominated by banks and other big global firms.
Boston Pizza Royalties, for instance, is a pretty steady, stable business. The fund earns royalties from franchisees who own restaurants branded Boston Pizza. There's not a lot of operational risk involved, and what happens in Greece or whatever trouble spot is not likely to have much effect on pizza demand in Canada. The stock pays a seven per cent dividend.
Here's the funny thing about dividend yields, though. A small change in the number can mean a big increase in the stock price. For instance, if you think investors would buy Boston Pizza stock even if it yielded only six per cent (the company is growing slowly but steadily), even without an increase in the dividend, the stock would go up 17 per cent. Add the seven per cent dividend and you'd make almost 25 per cent on your investment.
I think this is what's going to happen. In fact, I think it's already started. As income-seekers find their GICs rolling over from four per cent to two or less, they will be forced to reach for better payouts. And they'll find them in the smaller but otherwise quality companies on the exchange. I mentioned Boston Pizza only by way of example. There are many others. Have a look and reap the yield. Just as interest rates went down, so will dividend yields. Now's your chance to benefit.
Fabrice Taylor is an award-winning financial journalist and analyst, and author of the President's Club Investment Letter. Email him at: