Why investors should consider Canadian dividend-paying stocks

Canadian dividend-paying stocks offer an attractive opportunity as interest rates decline and investors search for yield.

“As interest rates come down, Canadian investors are starting to look for alternatives to some short-term assets they’ve been investing in, such as GICs, high-interest savings accounts and other money-market assets,” said Greg Zdzienicki, vice-president and client portfolio manager, equities, with CIBC Asset Management, in a recent interview.

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Canadian dividend-paying stocks offer “a very good opportunity to invest in high-quality companies that have sustainable dividend yields … supported by strong earnings growth,” Zdzienicki said.

Forward earnings expectations in Canada are 12.5%, Zdzienicki said, and sectors such as telecommunications, banking and insurance are expected to see dividend growth of about 7% to 12% over the next few years. “So, you’ve got a lot of sustainability and a lot of predictability in that dividend yield,” Zdzienicki said.

Dividends are also tax-efficient, he noted.

“Unlike GICs or other interest-bearing type securities that are taxed at your marginal tax rate, dividend income is paid by after-tax dollars,” Zdzienicki said. “So, the treatment that you get, the dividend tax credit, makes sure that as an investor you are keeping more of your actual income earned.” 

Another opportunity is the amount of money available to move to dividend-paying stocks from short-term investments — about $300 billion, Zdzienicki said.

“We expect about $100 billion of that to be coming due in the next couple of quarters,” he said. “So, by the middle of 2025, we can see a significant amount of money moving to equity-paying securities, which should be very supportive of equity prices going forward, even if there is any pullback in the economy or the markets.”  

He noted that some interest-sensitive stocks are trading at a 15% to 20% discount to their five-year averages.

Declining interest rates and investors’ rotation into higher-yielding Canadian equities should result in “outperformance and a normalization in terms of the historical average for things like REITs, utilities, telecoms and financials,” he said.

The energy sector, namely companies such as Canadian Natural Resource Ltd. and Suncor Energy Inc., is expected to benefit from the post-Covid earnings recovery in Canada, Zdzienicki said. And with higher cash flows and significant debt reduction, these companies have consistently returned capital to shareholders through dividends and share buybacks. 

“Energy companies have been driving so much cash flow that they’ve been able to increase their dividend payments to investors, as well as, at the same time, been able to buy back shares,” Zdzienicki said.

Zdzienicki noted the evolving opportunities in financials, saying, “With respect to banks, some of their margins have not improved as much as insurance companies yet, and as we continue to see that improving in the banks, I think we’re going to continue to see dividend increases going forward.”

In the insurance space, Zdzienicki sees potential in players such as Toronto-based Trisura Guarantee Insurance Co., which he expects will begin issuing dividends “once their growth normalizes.”

Overall, Canadian equities are attractively positioned, Zdzienicki said.

“The opportunity right now for Canadian equities is that they are poised to benefit from this rare combination of attractive valuations, of secular and cyclical growth drivers, that are going to drive these robust dividend yields and will lead to competitive total returns and good risk-adjusted returns for clients going forward.”

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