Deals on dividend stars

Yields are looking very nice relative to today's prices - here are a few tips to help with your stock picks from Morningstar's Director of Investment Research, Ian Tam

Ian Tam, CFA 16 April, 2020 | 1:06AM

 

 

Ian Tam: One redeeming quality about bear markets is that they can offer value-oriented investors an opportunity to enter into the market at substantial discounts to fair value. What's more, is that dividend yields also look very attractive at today's prices. So to help find some deals within the Canadian equity market, you might consider looking at Morningstar star rating for stocks. Stocks with a five-star rating are trading well below their fair value. Whereas stocks with a one-star rating are considered heavily overvalued.

So if you have a look at the chart here, it shows a time series of the average star rating for stocks in Canada. Today, Morningstar covers 70 companies in Canada, and the average rating is four stars. The last time this actually happened was during the financial crisis in 2008, a time that preceded a heavy recovery here in Canada. To be clear, we're not implying that this market correction is over and very few investors can predict that with certainty. However, we do believe that the impact of the coronavirus on global GDP will be nominal in the long run and the current depressed valuations provide investors with a great opportunity to find quality names at discounted prices.

We're also in a very low interest rate environment. So income-seeking investors that have historically relied on bond yields to provide income might find better ideas in dividend-paying stocks whose yields have shot up because prices have fallen. For example, Canadian banks a staple for many Canadian investors are showing yields not seen over the last 10 years. Although dividend yield on the banks has always been above the S&P/TSX Composite Index. They're now sitting at a whopping 5.8% on average, based on yesterday's close, with a rather large assumption that the banks keep their dividend safe. Today's yield provides a comparatively attractive entry point for dividend seeking investors who have the patience to ride out the storm.

For a few ideas on dividend-paying companies that are considered undervalued according to Morningstar, have a look at the link at the bottom of this video. I remind investors to ensure that you use these ideas in conjunction with an unwavering focus to your overall risk tolerance as we ride out the rest of this market firestorm.

From Morningstar, I'm Ian Tam.

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About Author

Ian Tam, CFA  is Director of Investment Research at Morningstar Canada. 

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