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By Allan Robinson
The Globe And Mail
Report on Business
Wednesday, August 23, 2006
It's easy to think about riding out a bear market before the share prices slump, but if stocks do get clobbered as a result of an economic slowdown, investors will feel better with some dividend-paying common shares in their portfolio, strategists say.
Adrian Mastracci, investment counsel at Vancouver’s ‘fee-only’ KCM Wealth Management, says, “In my view, quality never goes out of style.”
Those dividends can provide some share-price support and over the long run, companies with steady growth in dividends have proven to be among the best performers.
"Dividends historically represent -- and people don't often realize it -- roughly one-half of the total return on equities," said Michael Smedley, chief portfolio officer of Canadian General Investments Ltd., a closed-end equity fund with an investment portfolio of $833.7-million.
Over all, the fund's policy is to provide an annual yield of about 5 per cent from interest income, special dividends and capital growth, Mr. Smedley said. The yield on the shares in the fund's portfolio is currently 1.53 per cent, but it is significantly higher based on the book value of the investments, he said.
A $10,000 investment in CGI's common shares would have grown to $47,000 over the 10-year period ended June 30, 2006, which represents a compound average growth rate of 16.8 per cent, according to the company.
"In my view, quality never goes out of style," said Adrian Mastracci, an investment counsellor at KCM Wealth Management Inc. in Vancouver. “There is a favourable tax treatment on common dividends and in bad times, dividend-paying securities on companies like the banks, insurance companies and utilities hold up better than just growth companies,” he said.
After screening the S&P/TSX 60 along with 60 additional mid-caps, UBS Securities Canada Inc. came up with what it describes as a "true yield" for eight companies. The factors it assessed (in addition to their yield) were the dividend growth rate, the payout ratio and dilution caused by issuing common shares.
Starting with the dividend yield, UBS subtracted the three-year cumulative average growth rate of the shares outstanding, which is a dilutive factor. A more comprehensive measure takes into account the dilution, which reduces the true yield, while buybacks increase the yield, said George Vasic, UBS's strategist.
The eight companies and their current yields were Bank of Nova Scotia (3.2 per cent), Canadian Imperial Bank of Commerce (3.4 per cent), Canadian National Railway Co. (1.4 per cent), Great-West Lifeco Inc. (3.3 per cent), Manulife Financial Corp. (1.9 per cent), National Bank of Canada (3.2 per cent), Royal Bank of Canada (2.9 per cent) and Sun Life Financial Inc. (2.7 per cent).
Those companies provided a "true yield" of more than 3 per cent, no share dilution, more than five consecutive dividend increases with growth of more than 10 per cent and a payout ratio of less than 50 per cent, UBS said.
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