The Bank of Canada’s decision last week to lop another 50 basis points from its overnight rate was followed this week by the U.S. Federal Reserve’s move to cut 25 basis points from its own. Regardless of the relative size, falling interest rates tend to hurt the appeal of fixed-income investments like GICs while bolstering the attraction – and the dividend yields – of income stocks.
High-yield stocks from the financial sector are among the biggest beneficiaries of that phenomenon, as falling interest rates lower what they pay out to depositors and so lift their profit spreads. Historically, that’s been enough to drive up their share prices and dividend yields. Utility stocks benefit in much the same way as falling interest rates cut the carrying costs of their high debt loads. That tends to lift their stock prices and their yields. We think now is a good time to buy the best of high-yield stocks – not just for their current sustainable dividends but also for their prospects. Our search started with a list of dividend-paying Canadian financials and utilities. We then homed in on those with strong prospects for earnings growth before applying our Dividend Sustainability Rating system. It awards points to a stock based on key factors:two points if it has raised the payment in the past five years;one point for operating in non-cyclical industries;two points for a strong balance sheet, including manageable debt and adequate cash;one point if the company is an industry leader. Companies with 10 to 12 points have the most-secure dividends, or the highest sustainability. Those with seven to nine points have above-average sustainability; average sustainability, four to six points; and below average sustainability, one to three points.This website is the online home of The Successful Investor Inc. – the group of widely followed Canadian investment newsletters by editor and publisher Pat McKeough
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