Are Dividend Stocks Roaring Back To Life In August?

Summary

• Dividend stocks have outperformed the broader TSX gauge in the pandemic economy and have proved to be solid income proposition for investors
• The slow rebound in these dividend stocks was largely overshadowed by surge in gold and technology stocks.
• Many of these dividend stocks are beating analyst expectations and posting profits even as the broader economy contracts.

After months of market volatility and downturn created due to the insecurity generated by the pandemic, major dividend indices on the Toronto Stock Exchange have finally turned the tables around, raising hopes for income-loving investors.

Three key Canadian dividend indices, which track the highest-yielding stocks on the market that have raised their annual distributions, posted higher monthly and quarterly yields than the broader TSX index.

In the last one month, the S&P/TSX Composite Index has gained just 2 percent. In comparison, the composite high dividend index has rallied by 6.7 percent, while the Canadian dividend aristocrats and dividend indices have returned 3.44 percent and 3 percent, respectively.

Quarterly figures are no different. The dividend indices have posted 6.93 percent to 8.54 percent returns, higher that the broader TSX’s 6.33 percent yield.

However, the TSX composite index is ruling the roost on year-to-date gains despite posting negative returns of 3.32 percent. In comparison, the high dividend index has lost over 17 percent, while the dividend aristocrat and dividend indices declined by 14.89 percent and nearly 7 percent, respectively.

TSX Composite Index Gains vs Dividend Indices Gains, 2020

(Source: TSX)

The rally of these dividend indices follows months of underperformance and bottom-lows due to the pandemic-induced economic recession that brought the entire country to a grinding halt.

The slow rebound in these dividend stocks after the pandemic lows in March was largely overshadowed by surge in gold and technology stocks.

Many of these dividend stock companies are posting profits even as the broader economy contracts. Analysts expect these dividend earners to continue their rally on the stock market, as investors slowly wake up to the potential of these high-quality companies with strong balance sheets and better than expected financial results in recent weeks.

Moreover, with the Central Bank of Canada sticking to near zero interest rates, low bond yields are here to stay. As the companies keep posting better financial statements, investors will ditch the widespread notion of dividend cuts due to pandemic and return to safe dividend stocks.

Without any further ado, let’s take a look at promising stocks from dividend index:

Canadian Natural Resources Limited (TSX:CNQ)

Counted among largest oil and natural gas companies in the country, Canadian Natural Resources has announced quarterly dividends of C$ 0.425.

In its latest second quarter results, the company beat analyst projections to post revenues of C$ 2.07 billion. However, its topline declined from year-on-year with a net loss of $310 million in Q2/20.

Following the drop in oil prices and COVID lockdown, the company curtailed production to optimize production mix and maximize margins. It ended the second quarter with approximately C$ 4.1 billion liquidity, including credit and cash.

Canadian Natural Resources recently announced its plan to acquire Painted Pony Energy Ltd for C$ 461 million.

Its shares have rallied by 18 percent in one month and gained 23.2 percent in a quarter.

Royal Bank of Canada (TSX:RY)

Scrips of the Royal Bank of Canada rallied over 11 percent in a quarter and by 3.38 percent in a month. It has a current dividend yield of 4.424 percent and market capitalization of C$ 139 billion.

In its second quarter results, the Royal Bank of Canada reported a net income of C$ 1,481 million, down 54 percent from the previous year. The bank’s financials were affected by the global market shocks due to the pandemic and widening credit spreads, which resulted in diluted EPS of C$ 1.00, down 55 percent y-o-y.

Net income from insurance increased by C$ 26 million or 17 percent from a year ago while net income from investor and treasury services wing increased by C$ 75 million or 50 percent from a year ago. For the quarter ending April 30, the lender had an average Liquidity Coverage Ratio of 130 percent (approximately $66 billion), as compared to 129 percent in the previous quarter.

The Royal Bank of Canada, counted among the most profitable banks in the world, is the first Canadian financial institution to sign a long-term renewable energy Power Purchase Agreement with Bullfrog Power, a part of Spark Power company, and BluEarth Renewables.

The bank will announce its third quarter results on August 26.

TransAlta Renewables Inc. (TSX:RNW)

Shares of electric utility company TransAlta have advanced by 12.68 percent in one month and 4.56 percent in three months. In its second quarter results, the company reported a comparable EBITDA of C$ 115 million, up C$ 4 million or 4 percent from the same period in 2019. Adjusted funds from operations went up by 13 percent y-o-y. Cash available for distribution stood at C$ 67 million, up 14 percent to the same period in 2019.

The company management approved a monthly dividend of C$ 0.7833. Its current dividend yield is 5.964 percent and has a market cap of C$ 4 billion.

TransAlta Renewables operates energy generation and transmission facilities. It has wind, hydroelectric, natural gas, solar and natural gas pipeline facilities.