Three dividend stocks to own and one to sell now 

Three dividend stocks to own and one to sell now 

Guest post by Mike Heroux, The Dividend Guy, in collaboration with My Own Advisor about dividend stocks to own.

Mark and I have been fellow bloggers since 2011 as we share a great interest toward dividend paying stocks and love chatting about investing and retirement planning (FIRE, RE, Fi or FIWOOT!).

I really enjoyed Mark’s six phases to financial independence post!

What makes our discussions even more interesting is that we don’t always share the same point of view.

I believe we all learn a great deal when we are sharing and receiving different ideas.

Recently, Mark suggested I write a review about three of his favourite holdings: Bell Canada (BCE), Fortis (FTS) and Bank of Montreal (BMO). To be blunt, I think he should sell one of them!

Let’s find out which one and most importantly, why!

1. BCE (BCE.TO)

BCE is the largest Canadian telecom by market cap, about twice the size of Telus (T.TO). Combined with Rogers (RCI.B.TO) and Telus, all three companies own about 90% market share of wireless industry in Canada. After banks, telecoms are probably the safest industry in the country. With a yield around 5%, I share Mark’s interest for Bell.

Mark shared when he bought Bell and how long he has owned it in this post here.

What I Like About It
On top of its juicy dividend and its position in a strong oligopoly, I also like the fact that all BCE services are based on some sort of monthly subscription generating a consistent base for cash flow. This screams dividend payments. Management has maintained a high (but under control) payout ratio over the past 10 years. While distribution increased steadily since 2010, the cash payout didn’t move much. I think the management team should remain cautious, but there is room for dividend growth.

BCE shows a well-diversified business model and will continue to generate strong cash flow in the future. The company is a real money printing machine. As BCE is part of an oligopoly, there is limited competition and high barriers to entry. Since BCE offers a wide array of products, it can increase revenue generated by each customer.

Where It Could Go Wrong
As much as I like BCE, BCE debt levels are not be underestimated. BCE is a giant…with giant debt. This is not a perfect situation as interest rates are now rising or may likely rise. As the Canadian Government keeps pushing for more competition in the wireless industry, BCE may see additional competitors adding more pressure on margins in the future. BCE will also have to invest massively in 5G to remain competitive. This means lots of money spent outside their dividend growth policy.

My verdict: Hold BCE and cash the juicy dividend!

When you have the possibility to invest in a strong yielder such as BCE and still hope for a small stock appreciation growth, you must take a hold of it. Going forward, BCE may look more like a “deluxe” bond with limited capital appreciation, but a generous and sustainable dividend policy.

2. Fortis (FTS.TO)

Fortis is literally a legend among dividend income investors. This company has successfully increased its dividend for 45 consecutive years. The utility has grown from just $390M in assets when it was formed in 1987 to $52B today.

Mark told me he started buying Fortis almost 10 years ago and has been adding to this company via DRIPs over time.

What I Like About It
Besides its stellar dividend growth policy, there is a lot more to love about this Canadian dividend aristocrat. Fortis aggressively invested over the past few years resulting in strong and solid growth of its core business. FTS is widely diversified on both sides of the border and even have projects in the Caribbean.

By owning Fortis, you can expect this company to continue to grow as it is expanding. The company has a five-year capital investment plan of approximately $14.5 billion for the period 2018 through 2022, up $1.5 billion from the prior year’s plan. Chances are most of its acquisitions will happen south of our border. FTS yield isn’t impressive for a utility (~3.50%), but there is a price to pay for such a high-quality dividend grower. Plus, you can be assured that you will have a yearly paycheck raise!

Image courtesy of Fortis investor relations page.

Where It Could Go Wrong
Fortis remains a utility company. In other words, don’t expect astronomical growth from it unless it goes for more acquisitions. Fortis makes acquisitions in the U.S. in order to continue its growth by opening doors to a growing market (now counts for 66% of its revenue). It may be difficult for the company to grow to a level where economies of scale would be comparable to other U.S. utilities. The risk of paying a high price for other U.S. utilities is also present. Also, the company’s debt is now slightly lower than $23B. At one point, the company will have to put more focus on paying that down instead of growing through acquisitions.

My verdict: Hold FTS for the next 50 years!

Fortis counts over 3.3 million clients spread across North America and the Caribbean; and growing. All of its operations (99%) are regulated. This means their whole business model is protected against price fluctuation. With 45 years of dividend growth, Fortis has proven over and over its ability to run its business while rewarding its shareholders. You can definitely buy those shares and forget about them until your grandchildren discover them!

3. BMO (BMO.TO)

Alright, I said Mark should continue to hold BCE and FTS. That leaves this decision for Mark: I think he should sell his shares of BMO. But please keep reading…

This is Mark’s journey buying and holding Bank of Montreal, a stock he has held almost since day 1 as a dividend investor. 

I like BMO, but I think it just doesn’t fit in his portfolio. Who doesn’t like Canadian Banks? The problem is often that we love them too much…

What I Like About It
BMO decided to take the stock market path to help deliver growth. It was the first Canadian bank with its own ETF on the market. Competition is fierce there but being among the first Canadian issuers surely helped building a momentum in a growing market. Over the years, BMO concentrated in developing its expertise in capital markets, wealth management and the U.S. market. BMO also made innovative moves such as the introduction of its own ETFs and a robo-advisor: SmartFolio.

(Full disclosure, My Own Advisor has a partnership with BMO that offers cash back to investors.)

Growth will happen in these markets for banks in the upcoming years. BMO is well positioned to surf this tailwind.

In terms of dividend growth, BMO hasn’t been the most generous bank in term of dividend growth lately. Maybe it’s cautious management as it also shows one of the lowest payout ratios and a healthy yield. You can expect the bank to continue its mid-single digit dividend growth policy in the upcoming years.

Where It Could Go Wrong
Relying on capital markets and wealth management as main growth vectors means BMO can hit a speed bumps more often than its peers. While their fact sheet shows a dividend growth of 8% CAGR over the past 15 years, BMO isn’t that generous anymore. There are more generous banks to invest in. In fact, they are all showing a stronger dividend growth profile! (My source: Ycharts.)

My verdict: SELL BMO! (oh, you just lost me there!)

To Mark and other lovers of dividend paying stocks, should you really sell a gem of a stock such as BMO just because its dividend growth lags behind? Not at all. The reason why I think Mark should let go of BMO is simply because he owns many other banks too. While BMO would not be my #1 sell among Canadian Banks (Laurentian Bank (LB) and Canadian Western Bank (CWB) definitely are), there are better opportunities such as Royal Bank (RY), National Bank (NA), and TD Bank (TD).

I know Mark owns all big five banks, he might even own National Bank (NA). (Mark: I do).

I believe if you own 4, 5 or even 6 of the “big six” you are practicing diworsification to your portfolio. While Canadian banks have outperformed the market for as long as I can remember, they are still part of the very same sector. This means that a single event such as a housing bubble burst, and oil crash, an interest rate drop, a very bad credit cycle will hurt this bank and your portfolio at the same time. If you keep financials below 25% of your total portfolio, you won’t get hurt too much. But if you keep financials above this amount and beyond 40%… it’s a different game. Don’t say I didn’t warn you! ?

How about Intertape Polymer? (ITP.TO)
Following’s Mark taste for modest to higher yielding stocks, I’d like to discuss Intertape Polymer as a possible addition to any Canadian income seeking investors. Intertape Polymer Group Inc. manufactures and sells a variety of packaging products. The firm’s primary product categories include tapes, films, and woven coated fabrics. The company’s tapes include pressure-sensitive and water-activated carton sealing tapes, and flatback, duct, double coated, foil, electrical, and filament tapes. Intertape’s film products include stretch wrap, shrink film, air pillows used for protective packaging, and packaging machines. The woven coated fabrics include building and construction products and specialty fabrics. The majority of revenue comes from the United States – that provides some built-in diversification!

What I Like About It
With the rise of online shopping, the packaging industry should benefit from this tailwind. ITP expects to reach $1.5 billion in sales by 2022. Intertape is #1 and #2 in its main market in North America and shows international expansion opportunities. Management also expects to grow by acquisition to expand its current line of products, consolidate its activities, and open additional doors in international markets. In August 2018, the company completed the acquisition of Polyair Inter Pack for $146M. This was a strategic move to expand ITP product offering while opening doors to cross-selling opportunities to PIP’s clients.

ITP dividend more than doubled over the past 5 years and if you are Canadian, the ITP distribution is delivered to investors in USD $$ (if you are looking for your Florida budget, it’s a nice addition)!

This is Mark’s awesome list of Canadian stocks that deliver U.S. dollars dividends.  

Now, ITP doesn’t always increase its dividend as it keeps cash for more acquisitions. Still, the 23% dividend increase over the past 5 years combined with its yield of ~4.50% makes it a good candidate for any retirement portfolios.

Where It Could Go Wrong
During the latest financial crisis, ITP traded under $0.50. The company was on the edge of bankruptcy and management finally patched its boats and it stopped leaking. Numbers may seem great today, but I would remain cautious as the wind could turn quickly during a recession. The company’s success is linked to a strong economy and its growth by acquisition strategy.

Thanks Mike. Like you mentioned above, it’s great to compare notes and discuss how we invest, even if we don’t agree!

Mike is passionate about investing and we discuss investing offline and online often. I hope to have Mike back on the site again soon where we can compare notes on other stocks we like or wish to buy – and why!

Mike is so passionate about investing, in 2016, he took a leap of faith and left everything behind to travel across North America and Central America with his family.  I profiled Mike earlier on my site here – why his goal to live off dividends and distributions remains alive and well!

After driving through nine countries and staying three months in Costa Rica, he returned home to become a full-time entrepreneur. He quit his job as a private banker and put all his energy into Dividend Stocks Rock. Continue your reading here with how he invested a lump sum of money in 2017 and how he continues to find stocks that rock for his financial freedom journey.

All the best Mike and thanks for your take on some stocks in my portfolio.

What do you make of Mike’s feedback? Should I consider selling BMO? What about ITP?

Mark

My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.