Dividend equities enter choppy waters, a lithium stock play, and what the BoC rate hike means for investors

I tend to think in metaphor where the market is concerned. They all have limitations, but accurate metaphors can provide the context and perspective that helps make investing decisions.

I wrote previously that deep water sailing is my preferred comparison for investing. A sailor planning a trip from Southampton to Barbados can project the length of the voyage based on usual wind speed and currents, and assess the potential for bad weather based on seasonal patterns, in the same way an investor plots a long-term portfolio strategy.

The ocean, however, is completely indifferent to the planning and scheduling of sailors. It does what it wants, providing unexpected storms or cessation of wind with seeming randomness.

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Markets are also indifferent. They don’t care, for instance, that an investor requires a six per cent risk-free dividend yield to meet their retirement goals. It’s actually a bit crueller than that because in the market, the more investors want something, the less chance there is it will be available.

In the case of income, the hunger for yield in the U.S. has resulted in junk bond yields falling below the S&P 500’s. Goldman Sachs CEO Lloyd Blankfein called this ‘unnerving’  as it shows a blatant lack of risk sensitivity for income-seeking corporate bond investors.

The Bank of Canada is subject to its own specific mandate and as a result, can display its own form of indifference to the needs of domestic investors. Wednesday’s rate hike resulted in a significant 10 basis point surge in the Government of Canada five-year bond yield and this is not good news for current holders of domestic dividend-paying equities.

Dividend sectors have historically weakened when bond yields climb as investors shift assets from dividend stocks to bonds to reduce portfolio risk. In July, I estimated that in the real estate investment trust (REIT) sector,for instance, when the yield on the S&P/TSX REIT index was less than 350 basis points higher than the five-year bond, net asset values on the trusts can be expected to fall.

The indicated yield on the REIT index is 5.9 per cent and the five-year bond yield is 1.7 per cent. The difference, at 4.2 per cent, is not yet cause for alarm or mass reallocation of portfolios.

The trend in Canada, however, is towards higher policy rates and bond yields. As long as this lasts, investors might consider slowly trimming their holdings in dividend sectors. Or eventually find themselves fighting the market tide.

— Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

Chemtrade Logistics Income Fund. This security appeared on the positive breakouts list on Tuesday. Several of its positive attributes include an attractive 6.3 per cent yield with a sustainable monthly distribution, a reasonable valuation, a recent positive earnings beat, and a strong earnings outlook for the next quarter. Ontario-based Chemtrade provides industrial chemicals and services across its three main operating segments: Sulphur Products and Performance Chemicals (SPPC), Water Solutions and Specialty Chemicals (WSSC), and Electrochemicals (EC). Jennifer Dowty explains.

Nemaska Lithium Inc. This stock is another lithium play whose share price has only appreciated 2 per cent so far this year. That being said, the stock price may gain momentum in the months ahead. The consensus target price implies a potential return of 77 over the next 12 months. Quebec-based Nemaska Lithium is an upcoming producer of lithium hydroxide and lithium carbonate with operations in Québec. The company has developed technologies so it can produce high purity, battery-grade lithium hydroxide as well as lithium carbonate at its processing plant from its mine’s spodumene lithium hard rock deposit, enabling the company to be a low cost producer. Jennifer Dowty explains more about the stock.

The Rundown

Interest rates are rising. Here’s why your savings account isn’t growing

If you’ve parked some cash in a bank account or in GICs, you might be under the impression that the Bank of Canada’s two consecutive rate hikes over the past few months are good news: Savings rates are sure to rise, vindicating your responsible ways with money. You are wrong. Many financial institutions have already passed along this week’s central bank quarter-percentage-point hike to borrowers, raising their prime lending rates to 3.2 per cent on Thursday – but you may need a powerful microscope to see any increase in your savings rates. David Berman explains.

Trump, frothy stocks are on a collision course in the cruellest month for stocks

If it’s September, we must be in a state of anxiety. This is the cruellest month for stocks. Since 1950, the S&P 500, the world’s most cited equity benchmark, has lost ground on average during September. And this year looks ripe to repeat the pattern. You can choose your own misadventure: A potential apocalypse in North Korea? Yet another major hurricane in the continental United States? Growing political dysfunction in Washington? They each have the capacity to shake faith in this elderly bull market. Ian McGugan takes a look at the factors hitting the market in the near future.

David Rosenberg: How my loonie outlook has shifted after the BoC rate hike

The economist explains why he thinks any pullback in the currency will only be temporary and an opportunity for the bulls to move back in.

Three ways investors will benefit from BoC’s rate hike

Rising interest rates can put a shine on a number of investments, and Wednesday’s rate hike by the Bank of Canada illustrated some of the potential winners. If the central bank continues to raise its key rate in response to a humming economy, someinvestments will look even better. David Berman explains.

The bizarre gap between the Canadian economy and stock market is widening by the day

The relationship between the Canadian stock market and the domestic economy is verging on full estrangement. In the midst of a broad-based, geographically diverse Canadian expansion that could make this calendar year the best in more than a decade, Canadian equity performance ranks as the worst in the industrialized world. Tim Shufelt explains.

The ideal time to load up on Canadian bank stocks has arrived

Canada’s big banks delivered upbeat third-quarter results, but investors aren’t impressed. They should be. It was a good quarter: Bank profits from the six biggest banks rose 6 per cent over the previous quarter and 11 per cent over the third quarter of last year. That’s impressive for a big, mature sector. The results were also quite clean, which is to say that they reflected what the banks’ day-to-day operations can do, in contrast to some of the previous reporting seasons when results were complicated by notoriously volatile divisions or one-off divestments and provisions for credit losses. And the third reason to applaud the results is because profits beat analysts’ expectations, which suggests that the market might not be giving enough credit to the banks. David Berman looks more closely at the banks.

What Excel Funds CIO Christine Tan is buying and selling in emerging markets

Emerging markets have performed well in recent months and Christine Tan says it’s not too late for investors to get in. The chief investment officer at Excel Funds Management Inc., which has about $800-million over all in assets under management, believes emerging markets are still a good bet for longer-term, diversified investors. Brenda Bouw recently spoke with Ms. Tan about her outlook for emerging markets, a stock she’s buying more of and one she missed.

Regulators approve Canada’s first bitcoin fund manager

Canada’s first registered bitcoin investment fund manager dedicated to cryptocurrency investments has been approved by regulators. The British Columbia Securities Commission (BCSC) granted Vancouver-based First Block Capital Inc. registration as an investment fund manager and an exempt market dealer in order to operate a bitcoin investment fund in Ontario and British Columbia. Clare O’Hara explains.

Others

The week’s most oversold and overbought stocks on the TSX

Canaccord Genuity reveals its top 10 dividend growth stock picks

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Friday’s Insider Report: Companies insiders are buying and selling

Thursday’s Insider Report: Companies insiders are buying and selling

Wednesday’s Insider Report: Companies insiders are buying and selling


Number Crunchers

Fourteen top-ranked, large-cap North American stocks

Eighteen dividend-paying U.S. real estate stocks that deserve a closer look

Six defence stocks paying stable dividends

Ask Globe Investor

Question: In your recent column on H&R Real Estate Investment Trust, you discussed several reasons that the REIT should be trading at a higher price but said little about why its units (HR.UN) have been languishing. Can you elaborate?

Answer: In a recent report, RBC Dominion Securities Inc. analyst Neil Downey argued that H&R’s “business may simply be too complex.”

H&R began in 1996 with a focus on office and industrial properties in Canada but has since expanded into retail and residential real estate and also built a large presence south of the border. Moreover, in addition to its assets in major metropolitan centres, it now owns dozens of properties in secondary and tertiary markets. While many of these assets have long-term leases, they often suffer from “completely flat rental profiles,” Mr. Downey said.

To increase H&R’s appeal with investors, Mr. Downey advocates streamlining the portfolio and “moving the overall quality and character … further upmarket.” H&R has already taken steps in that direction with acquisitions such as Corus Quay, an office building on Toronto’s waterfront, and a 50-per-cent stake in Jackson Park, a luxury residential development in Long Island City, N.Y.

Regarding potential asset dispositions, Mr. Downey said H&R should consider selling “a wide swath or all” of its single-tenant U.S. retail properties; its 33.6-per-cent stake in U.S.-based Echo Realty (which operates grocery-anchored retail centres); “some or all” of its part-owned U.S. industrial real estate; and “many of the scattered, smaller/tertiary market Canadian retail, office and industrial properties.”

H&R could use the proceeds to reduce debt, repurchase units and redeploy capital into more promising areas such as its pipeline of wholly or partially owned residential and mixed-use developments in U.S. cities such as San Francisco, Miami, Austin, Dallas and Seattle, for example.

H&R has many strengths, Mr. Downey said, including prudent financial leverage, strong liquidity, a portfolio that is generating “stable to modest long-term growth” and a payout ratio that is “in check” at about 88 per cent of adjusted funds from operations. As such, H&R’s situation is not “acute” and the REIT does not require “major surgery,” he said.

However, if H&R were to trim its portfolio selectively, “the potential payoff is in what could come out the other end: We believe a more focused and cohesive, albeit still diversified business, with higher overall asset quality” and a unit price that trades at a higher multiple to cash flow and is more in line with the underlying net asset value of the portfolio, Mr. Downey said.

–John Heinzl

Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.

What’s up in the days ahead

In the Canadian energy sector, where it’s often been difficult to recommend stocks, one in particular stands out for its lack of analyst enthusiasm: Imperial Oil Ltd., the oil-and-gas company majority owned by international giant Exxon Mobil Corp. David Milstead will explain why in Saturday’s Globe Investor. And John Heinzl is back with his annual back-to-school quiz. Get ready to take the ultimate investing test.
Click here to see the Globe Investor earnings and economic news calendar.


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Compiled by Gillian Livingston

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