Utilities, telecoms have dividend power

I don’t need convincing about the power of dividends to drive my investment returns, but I like to be reminded of it from time to time.

It helps put current anxieties in context by recognizing that political and economic events come and go, markets rise and fall, but what really matters is the quality of the companies you buy. Strong businesses with good prospects and dividend payments that rise are worth owning in all conditions.

An article on the web site of Hartford Funds, a mid-size US money manager, reinforced my thinking. The article looked at the significant role dividends have played over long periods, particularly when accompanied by dividend reinvestment, something I’ve written about before.  

 The big number in the article is that between 1960 and 2023, 85% of the cumulative total return of the S&P 500 Index can be attributed to reinvested dividends. The example given was that US $10,000 invested in the index in 1960 was worth US $5.2 million in 2023, if all dividends were reinvested. If dividends were removed the return was 15% of that or $796,000, attributable only to the appreciation of share prices.

Performance varied greatly from decade to decade. In the high inflation 1970s when stocks struggled to gain ground, dividends contributed 73% of all returns. In the 2010s with zero inflation and near-zero-rates, dividends were less popular, so the portion of returns fell to 15%.

A recent issue of the Mauldin Economics newsletter weighed in on dividends from a different perspective. It noted that between 1973 and 2021, companies listed on US exchanges that paid dividends had an average annual return of 10.68%. Non-dividend payers returned less than half that – an average 4.79%.

The question for investors is where to look for these sorts of returns. In a cautionary environment many opportunities lie close to home in defensive sectors, such as utilities, Real Estate Investment Trusts (REITs) and telecoms. These companies are portfolio anchors with large well-developed businesses and big moats. They have steady cash flows and are least likely to be directly affected by tariffs, though influenced by general economic conditions. They are recession-resistant, though not recession-proof.

 REITs and telecoms in particular have been out of favour, but their star may be on rise. The most recent issue of BMO Nesbitt Burns market strategy suggests that in addition to those sectors investors may also take a look at consumer staples and healthcare.

An annual look at dividends by independent Toronto market analyst Veritas Research offered some overlap with BMO and made some interesting picks for 2025.  

Veritas looked for stocks with yields over 3% for the most part, with strong balance sheets, reasonable payout ratios and strategies that have the potential for earnings and dividend growth.  

 Here are some of their highlights:

Telecoms: Veritas notes the telecom sector was the worst-performing on the TSX in 2024 with a total decline of 21.1%. That has made shares prices attractive and bumped up their yields.

Its top pick is Cogeco Communications Inc. (TSX: CCA), the second largest cable operator in Ontario and Quebec. The stock has a current yield of 5.2% and Veritas sees potential for the dividend rising by 5-10% annually.    

Consumer Staples & Discretionary: Veritas sees more good things from Canada’s grocers, noting Metro (TSX:MRU) and Empire (TSX:EMP.a) raised their dividends by 10% in 2024  while Loblaw (TSX:L) raised its dividend by 15%.  It points out that Metro and Empire are dividend aristocrats with 29 and 30 consecutive years of  hikes, with Loblaw’s increasing its payout for 13 consecutive years.

It sees all three with sustainable 10% annual dividend growth, with yields under 2%.

REITs:  Veritas likes Canadian REITs for their stability. Three of its top four picks own apartments, or multi-family rentals. The fourth is involved with industrial storage.

Vertas believes Boardwalk REIT (TSX: BEI.un), Killam Apartment REIT (TSX: KMP.un) and InterRent REIT (TSX: IIP.un) will be able to deliver annual increases over the medium term of between 6.5% and 8.5%.  It expects Granite REIT (TSX: GRT.un), with the highest yield of the group at 4.7% to deliver almost 9% annually. This REIT specializes in logistics, warehouse, and industrial properties in North America and Europe.

Utilities & Infrastructure:  Veritas sees a safe haven in this group with depressed share prices and a flight-to-safety appeal offering upside potential.

 It believes that Canadian Utilities Ltd. (TSX: CU), Enbridge Inc. (NYSE, TSX: ENB), Hydro One Ltd. (TSX:H) and South Bow Corp.  (NYSE, TSX: SOBO) all offer opportunity.

Choosing among them depends on each investor’s preference for dividend yield versus growth prospects. Veritas thinks Hydro One is pricey, but says it has the most attractive sustainable dividend growth in the sector. The stock has nudged new highs last week and is up 11% year-to-date.

 Dividend stocks won’t escape the fallout caused by Trump tariffs, but if you stick to top tier companies, the so-called dividend aristocrats, chances are good these companies will fall least and recover first when conditions improve.

Along the way the dividends will provide a reliable cash cushion to counter changes in their share prices.

This article appeared in a recent issue of the Income Investor.  For information on how to reprint this article please view this page.