Connect with us

Economics

10 of The Best Canadian Dividend Stocks to Buy in October

One of the best ways to increase the value of a stock portfolio while protecting it from adverse market movements is to add Canadian dividend stocks. Particularly Canadian…

Share this article:

Published

on

This article was originally published by Stock Trades

One of the best ways to increase the value of a stock portfolio while protecting it from adverse market movements is to add Canadian dividend stocks. Particularly Canadian Dividend Aristocrats, that will provide income in any market environment.

Many investors first learning how to buy stocks in Canada want to know what the best options are today. This is why we decided to make a list of the top ten options in Canada.

This list of top Canadian dividend stocks takes 3 things into consideration

The growth, safety, and current yield of the dividend.

A high yielding income stock may be placed lower on this list due to safety, and a low yielding stock could be placed higher on this list due to the company’s dividend growth.

Warning – The best dividend stocks don’t always have the highest yield

A mistake that is made time and time again with dividend investors, particularly new ones that haven’t been burnt yet, is having tunnel vision on the dividend yield. They ignore the dividend payout ratio or the financial health of the company, and instead chase high yields to generate larger passive income.

Unfortunately for many in early 2020, this strategy resulted in devastating consequences. We witnessed the quickest pace of dividend cuts in history, and many income stocks that were bloated in value due to their high yields saw their share prices collapse.

Chasing yield is one of the biggest and most common mistakes beginners make, and it is imperative you put the quality of the company at the top of your list, rather than how much it will pay you.

Is there an ETF to make dividend investing easier?

Many people who don’t have the time to consistently monitor a dividend portfolio want to make their lives easier via an ETF. Fortunately, we have a plethora of them in Canada.

Whether it is Vanguard, Horizons, BMO or iShares, there are a wide variety of dividend ETFs Canadians can choose from to generate passive income in a single click. Some quick examples?

  • Horizons Active CDN Dividend ETF (TSE:HAL)
  • BMO Canadian Dividend ETF (TSE:ZDV)
  • S&P/TSX Canadian Dividend Aristocrats Index Fund (TSE:CDZ)
  • iShares Core S&P/TSX Composite High Dividend Index ETF (TSX:XEI)
  • iShares Canadian Select Dividend Index ETF (TSX:XDV)

It’s important to note that these dividend ETFs do come with management fees, and need to be considered prior to purchasing.

If you’re looking for the cream of the crop in terms of Canadian dividend stocks, you’ll want to read this….

This list doesn’t contain any stocks we have highlighted over at Stocktrades Premium on our Dividend Bull List. If you want the true best of the best, click here to get started for free

We highlight market-beating income stocks for over 1800 Canadians, and have nearly tripled the overall returns of the TSX Index since our inception.

We also have a game changing dividend safety screener that can help you make better decisions.

With that being said, lets look at some of the top dividend stocks in Canada right now.

What are the best dividend stocks in Canada?

10. Bank of Nova Scotia (TSX:BNS)

In reality, we could litter our top 10 list with Canada’s Big Five banks. They are among the most reliable income stocks in the world.

Lets start with a Canadian dividend stock that focuses on yield.

As of writing, the Bank of Nova Scotia’s (TSX:BNS) 4.5%~ yield is the highest of the Big 5 banks and National Bank.

The Bank of Nova Scotia has grown its dividend every year since 2010, during which time it averaged approximately 6% annual dividend growth. The bank first paid a dividend in 1833 and has never missed a dividend payment since.

It has also raised dividends in 43 of the past 45 years. The 2008 Financial Crisis halted all the dividend growth streaks of Canada’s Big Banks. However, not one cut the dividend. This is in stark contrast to what happened worldwide.

A similar phenomenon is happening today. European Banks have been forced to cut the dividend, and some US banks such as Wells Fargo have also cut in 2020. In Canada, it is steady as it goes.

However, there is one key difference. The Feds have asked Canada’s banks not to raise the dividend during the pandemic. There is no current risk of a dividend cut at the Bank of Nova Scotia, however the company will not maintain its current 10 year dividend growth streak because of the restrictions.

Banks like Royal Bank, Bank of Montreal, and Toronto Dominion Bank raised just prior to the pandemic, so their streaks will stay in tact. CIBC and Scotiabank were not as lucky.

But, don’t let this discourage you. The Bank of Nova Scotia is still an excellent option for high yield seekers.

Buying the Big 5 bank that has the highest yield has proven to be a good idea historically, and locking in a yield over 4.5% at a time when the Canadian 10 year bond yield is extremely low is an opportunity too good to pass up.

Scotiabank has been mired in inconsistencies in the past and has struggled to keep up with the other major banks. This is primarily why it is currently the highest yielding. But there are signs the company is quickly turning the corner, and has been one of the best in terms of performance over the last year.

Scotiabank 10 year returns vs the TSX

TSE:BNS VS TSX

9. Magna International (TSE:MG)

Magna

Magna International (TSX:MG) is establishing itself as a strong dividend stock worthy of investors’ consideration. It is one of the largest auto parts manufacturers in the world.

Magna supplies car companies with a wide range of parts, including many parts required for the production of electric vehicles and self driving cars. 

This exposure to EV vehicles is what many have overlooked in the past, thinking of Magna only as an archaic automobile parts manufacturer. This couldn’t be farther from the truth.

However, auto parts are a cyclical business. To succeed in both navigating the cycles and maintaining a reliable dividend, you need strong management, ones that can build a balance sheet to withstand all economic conditions.

Magna has just that. The company has over a billion in cash and its debt is under 1.3 times its EBITDA at the time of writing.

Not only that, but Magna has proved in 2020 that it has an extremely resilient business.

While Magna suffered a loss in what was a quarter in which peak lockdowns were having significant impact on all companies, it quickly rebounded in the third and fourth quarters of 2020 to post positive net income, and has continued to do so to close out 2021.

With Magna’s exposure to the fast growing electric vehicle industry, the company is well positioned to overcome any market cycles and keep growing its dividend.

Forward estimates of Magna’s earnings would lead to its payout ratio being in the sub 25% range.

Given this, Magna can be counted on to keep its dividend growth streak going. The company has a 11-year dividend growth streak and the dividend has grown by mid double digits on an annual basis over the last 5 years.

Magna is also trading at attractive valuations. Despite its recent run up in price, it’s trading at under 10 times forward earnings. Which, despite being above historical averages, is a solid price to pay for the company considering its potential growth in the EV market.

Magna International 10 year returns vs the TSX

TSE:MG Vs TSX

8. Alimentation Couche-Tard (TSE:ATD.B)

Couche Tard stock

Alimentation Couche-Tard (TSE:ATD.B) is one of the best Canadian dividend stocks to buy today, yet it doesn’t get much attention in the dividend world.

Why is that? Well, we’ll get to that in a bit.

With a market cap in excess of $50B, Couche-Tard is one of the largest convenience store operators in the world, and has over 15,000 stores globally.

If you’re from Eastern Canada, “Couche-Tard” will be a common name. However, the company tends to run under arguably its most popular brand, Circle K. 

Circle K is truly a global brand, selling gasoline, beverages, food, car wash services, tobacco, and so much more across North America and Europe, but also in countries like China, Egypt and Malesia.

Now that we know what the company does, lets move on to the dividend. Couche-Tard has been growing its dividend at an exceptional rate. In fact, the main reason Couche-Tard is on this list is because of its growth.

With an 11 year dividend growth streak, a 5 year dividend growth rate of over 22% and a payout ratio under 10%, this is a company that is in one of the best positions in the country to fuel dividend growth for investors.

With a yield of less than 1%, it’s often overlooked by income seekers. However, we do have to take into consideration overall returns here. And if we do that, Couche-Tard is simply a no brainer.

With this type of dividend growth, its yield can only remain low if one thing is occurring, rapid share appreciation. And, this is 100% the case. In fact, a $10,000 investment in Couche-Tard just a decade ago is now worth over $100,000.

At that point, I don’t care about the yield. I’ll sell some shares and create my own dividend!

If there’s one stock on this list that should make investors reconsider how important yield is to them, it’s definitely Couche-Tard. The company is a more established blue-chip play now, so growth won’t be as extensive, but it’s still got a ton of room.

As a bonus, it’s also one of our Foundational Stocks over at Stocktrades Premium. We give 3 of our 10 Foundational Stocks to members who sign up for free today. So, click here to get started!

Couche-Tard 10 year returns vs the TSX

TSE:ATD.B Stock Vs TSX

7. Metro (TSE:MRU)

metro dividend

Metro (TSE:MRU) is one of the largest grocers in the country, and is also one of the most reliable Canadian dividend stocks to own today.

Consumer staple stocks like grocery stores tend to be viewed as “boring” options. In the midst of the COVID-19 pandemic, as growth stocks were out of control, defensive options like Metro were cast aside.

But, as we shift toward reopening and life gets back to normal, it’s starting to get more attention, justifiably so.

In terms of dividend, Metro is tied for the 8th longest streak in the country with crude oil producer Imperial Oil and fellow retailer Empire Company. However, one of the clear differentiators between Empire and Metro is Metro’s dividend growth.

With a 26 year dividend growth streak, the company also sports double digit 1 and 5 year growth rates. From a company operating in a mature sector like Metro, this is outstanding dividend growth.

With payout ratios in terms of earnings and free cash flows in the mid 20% range as well, this signals that the company shouldn’t be slowing this dividend growth pace anytime soon.

The company is not a pure-play grocer either. It entered the pharmacy scene with a major acquisition of Jean Coutu in 2018, and overall it has one of the most dominant presences in Quebec out of all major grocery stores. The province currently holds over 70% of its owned and franchised food and drug stores.

You’re not going to knock it out of the park with a company like Metro in terms of capital appreciation. But, you’re going to get a reasonable mid 1% dividend yield and likely mid to high single digit growth.

Not every stock inside of your portfolio needs to be flashy. And, if the capital markets do take a hit like we witnessed in 2020, shareholders will be thankful, as its share price was largely unaffected.

Metro 10 year returns vs the TSX

TSE:MRU Vs TSX Index

6. Canadian Apartments REIT (TSE:CAR.UN)

canadian apartment properties reit

Canadian Apartments REIT (TSE:CAR.UN) is one of the largest residential real estate trusts in the country.

The trust has a dominant presence in the sector and is one of the most popular REITs in Canada.

You might be saying right now “well I’m not looking for the top REITs, I’m looking for the top dividend stocks!”

But the reality is, if you’re looking to build a strong dividend portfolio, there is a good chance it’s going to contain a portion of REITs for a few reasons.

For one, a real estate investment trust is forced to pay back a particular percentage (90%+) of its earnings to unitholders. Being a common shareholder of a stock, the dividend does not necessarily need to be placed highest on the totem pole.

And secondly, due to the fallout of the pandemic in 2020 and 2021, inflation is going to be a long standing fear and overall concern when it comes to the deterioration of investor capital.

So, what performs exceptionally well in times of high/rapid inflation? Real estate. Which is one of the reasons why CAPREIT makes this list.

The company primarily engages in the acquisition and leasing of residential properties here in Canada. The company’s portfolio contains both mid-tier and luxury properties, and generates the majority of its revenue from the Toronto and Greater Montreal regions.

CAPREIT is in one of the best financial positions out of all Canadian REITS, with a debt to gross book value under 40%, and its dividend accounts for less than 75% of funds from operations.

In 2020, the company was added to the the TSX 60 Index, which represents 60 of the biggest companies on the Toronto Stock Exchange.

The REIT doesn’t have the flashy yield that many others do in the mid 2% range. However, it’s important to understand that while payout ratios were high and dividends were getting cut in the sector during the pandemic, CAPREIT was at no risk of cutting the distribution.

As mentioned at the start of the article, the reliability of a dividend is much more important than the overall yield.

CAPREIT 10 year returns vs the TSX

TSE:CAR.UN Vs TSX

5. Canadian Natural Resources Ltd (TSE:CNQ)

CNRL stock

For the longest time, we avoided putting any Canadian oil producers on this list. But, the environment has certainly changed, and oil companies have a chance to perform exceptionally well over the next few years.

So, why Canadian Natural Resources (TSE:CNQ) and not a company like Suncor or Imperial Oil? Well, Canadian Natural has proven time and time again it is the best major oil and natural gas producer in the country.

The company has raised the dividend for more than 2 straight decades, and has double digit 1 and 5 year dividend growth rates. 

Despite major producers like Suncor and many junior producers slashing the dividend at a record pace, Canadian Natural managed to actually raise the dividend in the midst of a global pandemic and oil crisis.

The company is one of the lowest cost producers in Canada with breakeven prices in the $35~ WTI range. This makes the company extremely reliable in almost any price environment as cash flows will remain positive.

At $70 WTI, which would be considered the low point prediction by most analysts over the next few years, Canadian Natural will be able to generate a significant amount of free cash flow, and is in an outstanding position to return it back to shareholders.

New projects and expansion are likely to be put on the backburner as balance sheets are restored, and instead Canadian Natural will likely look to return capital to shareholders through increased and special dividends.

Despite the extremely bullish situation for Canadian Natural Resources, it isn’t as high on this list as others. Why? 

The cyclical nature of the business makes it very difficult to profit from oil and gas companies over the long term. Timing a proper exit when the market begins to turn sideways or downwards is critical to outperforming.

Canadian Natural’s share price still does have some upside here, but capital gains shouldn’t be your focus with oil and gas producers. Instead, soak up the dividends during this oil and gas boom, and try to find an opportunity to exit when things calm down.

Canadian Natural Resources 10 year returns vs the TSX

TSE:CNQ Vs TSX

4. TC Energy (TSX:TRP)

TC Energy Logo

We can’t talk about the top dividend stocks in Canada without mentioning one of Canada’s pipelines. TC Energy (TSX:TRP) is the second-largest midstream company in the country and it owns a 20-year dividend growth streak. This is tied for the 13th longest dividend growth streak in the country.

The company provides 25% of North America’s natural gas transmission and has over 93,300 km of natural gas pipelines.

Over the course of its dividend streak, it has averaged 7% dividend growth. The company has guided that it intends to grow the dividend 7% in 2021, and 5-7% in the years after that.

When the price of oil was crashing, the company continued to reiterate its dividend guidance. Now that we’re are seeing the price of oil recover and the economy reopen, it’s likely TC Energy, despite not being impacted as much by the price of oil as a producer, will still get some of the growing oil price tailwinds.

The company has a low-risk business model in which 95% of EBITDA is generated from regulated or long-term contracted assets. This is exactly why in the midst of the pandemic it stated that operations were relatively unaffected.

Many pipelines have take-or-pay contracts with producers. Which means regardless of product shipped, the pipeline gets paid. This creates extremely reliable cash flows and is why companies like TC Energy and Enbridge have some of the safest, most reliable dividends in the country.

The company currently yields over 5%, is trading at less than 15 times forward earnings and is set to benefit from an energy crisis that, for many analysts, feel is just getting started.

TC Energy 10 year returns vs the TSX

TSE:TRP Vs TSX Index

3. BCE (TSX:BCE)

BCE dividend

When it comes to moat and reach, BCE (TSX:BCE) ranks up there with the best. Is it the best telecom to own for overall growth? No. But, is it a dividend beast? Absolutely.

In fact, if you invested $10,000 into the company in the mid 1990’s, it’s looking like over $370,000 today if you had reinvested the dividends.

It is the largest telecommunications firm in the country and provides services to over 9.6 million customers across Canada in the form of its wireless, wireline and media segments.

It is the only one of Canada’s Big Three telecoms to have a strong presence from coast-to-coast. Rogers tends to have more exposure in the east, and Telus in the west.

BCE currently yields in the mid 5% range, which is right around the company’s historical average. The company has a 12-year dividend growth streak over which time it has averaged approximately mid single digit dividend growth.

At first glance, the 12-year dividend growth streak might not seem that impressive considering the company’s long and storied history. However, the streak is a little misleading.

The company froze the dividend in 2008 when it was being taken private by a group led by the Ontario’s Teachers Plan.

However, the deal ultimately fell through and the company resumed growing the dividend. Since it went public in 1983, BCE has never missed a dividend payment, nor has it cut the dividend.

One of the biggest drawbacks with the company is the high payout ratios. Currently, the dividend accounts for more than 100% of earnings.

Although this is concerning, the rate as a percentage of cash flows drops considerably. Currently, the dividend accounts for only 93% of free cash flow. This is still high, but when we factor in the company’s long standing history, I think they can make the ratios work.

BCE is neither cheap, nor expensive when compared historically or to its peers. Not surprising as BCE is one of the most consistent and reliable stocks in the country.

Don’t expect earth shattering returns from the company’s share price. But, own this one for a decade and reinvest the dividends, and you’ll likely be happy.

BCE 10 year returns vs the TSX

TSE:BCE Vs TSX Index

2. Royal Bank of Canada (TSX:RY)

Royal Bank dividend

The Royal Bank of Canada (TSX:RY) is the largest bank in Canada and is among the largest companies in the country. It has been named Canada’s most valuable brand for six years running and is consistently among the best performing Big Five banks.

In fact, it has been the top performing Big Five bank over the past 3, 5, and 10-year periods. 

The company has operations in the capital markets via RBC Direct Investing, but also deals with commercial banking, retail banking and wealth management.

Given the strong results posted by Canada’s banks during this pandemic, we believe that it is only a matter of time before Canada’s Big Banks receive the green light to once again raise dividends. 

Today, the best positioned to do so is Royal Bank.

At 41%, RBC has the lowest payout ratio among its peers. It is also important to note, that the respectable payout ratio is on a trailing twelve-month basis, which means that it still includes some pandemic related quarters. So, you can expect this payout ratio to continue heading lower.

The company is the Canadian bank with the most geographical exposure, to over 37 countries in fact. This allowed the bank to perform exceptionally well during the pandemic as it was exposed to a variety of countries that were at different stages of recovery/lockdown, unlike a bank like TD Bank, which relies heavily on the United States.

There are rumors that interest rates are going to be on the rise sooner rather than later, as the Bank of Canada may have over estimated the impacts of the pandemic on the economy. In order to “cool” it off, they’ll have to raise rates and slow borrowing. 

Financial companies perform best in rising rate environments, so there might be more room to run for Royal Bank, and other Canadian financial companies.

Royal Bank owns a 10-year dividend growth streak over which time it has grown the dividend by mid single digits annually. Now yielding in the low 3% range, the Royal Bank is deserving of its place among Canada’s top dividend stocks.

Royal Bank 10 year returns vs the TSX

TSE:RY Vs TSX

1. Fortis (TSX:FTS)

Fortis dividend

Fortis (TSX:FTS) has been a mainstay on our list of top dividend stock for years. As the largest utility company in the country, Fortis is arguably one of the most defensive stocks to own.

Fortis owns the second-longest dividend growth streak in Canada. At 48-years long, the company will be among the first Canadian stocks to reach Dividend King status – a prestigious status reserved for those who have raised the dividend for at least 50 consecutive years.

Given our current environment of uncertainty, dividend safety and reliability is the main reason why Fortis is our top dividend stock in Canada.

Throughout the past three, five, and ten-year time frames, Fortis has consistently raised the dividend by approximately 6%.

Further demonstrating its reliability, Fortis is one of the few companies which provides multi-year dividend growth targets.

Through 2024, Fortis expects to raise the dividend by 6% annually – inline with historical averages.

Unlike Royal Bank which would have benefitted from rising interest rates, a company like Fortis would be negatively impacted by interest rates. This is because utilities are a capital intensive industry, one that requires a lot of capital investments and debt to build infrastructure like power generation facilities and transmission lines.

However, Fortis’s movement in price has been relatively unimpacted by rising rates, and likely won’t be moving forward. That is a strong sign of confidence in the company.

$10,000 in Fortis in the mid 1990’s is now over a quarter million dollars if you reinvested your dividends. The company has simply been an exceptional performer.

And, with a beta of 0.05, indicating this stock is 1/20th as volatile as the overall market, it seems to operate almost more like a bond.

Combine strong dividend growth with an attractive yield in the mid 3% range and you are looking at the top income stock to own in Canada today.

Not only can investors lock in a safe and attractive dividend, they can do so at respectable valuations.

Fortis 10 year returns vs the TSX

TSE:FTS Vs TSX Index



Author: Dan Kent

Share this article:

Economics

3 Stocks to Buy for Rising Inflation and Slowing Growth

The post 3 Stocks to Buy for Rising Inflation and Slowing Growth appeared first on Millennial Money.
What happened to the stock market’s rally? Through…

Share this article:

The post 3 Stocks to Buy for Rising Inflation and Slowing Growth appeared first on Millennial Money.

What happened to the stock market’s rally? Through the end of August, both the S&P 500 and Dow Jones Industrial Average exceeded full-year returns in 2020. The S&P 500 even reported 53 record closes through August, putting it on pace for the most record closes ever. 

But we all know stocks can’t go up forever and quite a few investors were expecting a September sell-off. That’s understandable: since 1950, all major indices have averaged negative returns during the month in what’s known as the “September Effect.” In a case of history repeating itself, the Dow Jones dropped 4.3% and the Nasdaq fell 5.3% last month. 

However, it wasn’t a market anomaly that led to the September sell-off, but rather increasing fears of “stagflation”—rising inflation and slowing growth.

3 Stocks to Buy for Rising Inflation

Here are three stagflation stocks to buy this fall.

  1. McDonald’s
  2. JPMorgan Chase
  3. ExxonMobil

McDonald’s (NYSE: MCD)

The inflation-proof, unique business model of McDonald’s

  • McDonald’s (NYSE:MCD)
  • Price: $238.44 (as of close Oct 21, 2021)
  • Market Cap: $180.277B

Although shares are up more than 110% in the last five years, McDonald’s Corporation is well situated to outperform the market in a stagflationary environment. To understand its rare opportunity, it’s important to properly understand their business model. 

Most investors believe the company is a restaurant operator when they are really a restaurant franchisor and, more aptly, a real estate juggernaut. In the United States, approximately 95% of all restaurants are franchised, and those franchises provided 60% of the McDonald’s revenue and a whopping 85% of its margins in the most recent quarter.  

The difference is key when you consider a stagflation environment. McDonald’s charges its partners both rent and a royalty that are paid for in the form of a percentage of sales. According to the Service Employees International Union, these two charges total 15% of gross sales

Gross sales are the key words above. McDonald’s revenue from franchises is based solely on the top number—not on profit. That means the company’s business model mostly avoids the cost of higher labor, food, and packaging in its cost of goods while price increases by its franchisees are directly captured by the company. Simply put, the company is a winner in an inflationary environment! 

McDonald’s doesn’t want its franchisees to suffer and adds value to its restauranteurs in the form of its strong domestic supply chain and buying power. As a result, McDonald’s will be able to keep food inflation in check and avoid stock-outs for its franchisees more than mom-and-pop restaurants. It’ll also avoid food inflation in contrast to grocery store prices, which makes it a more affordable option than competitors and consumer substitutes like cooking and eating in the home.

On a competitive basis, fast food is in a sweet spot during a stagflationary environment. Rising prices at higher-cost fast-casual restaurants will benefit a cheaper option like McDonald’s. 

Full-service restaurants that depend upon more waitstaff and other labor providers will be understandably challenged when pitted against a QSR giant like McDonald’s. Stagflation, as defined by rising labor and product costs along with consumers carefully watching their wallets, puts McDonald’s in a rare sweet spot in the restaurant industry. 

JPMorgan Chase (NYSE: JPM)

JPMorgan Chase is a best-of-breed pick in a strong industry

  • JPMorgan Chase (NYSE:JPM)
  • Price: $171.78 (as of close Oct 21, 2021)
  • Market Cap: $500.923B

Mark Twain once quipped, “history doesn’t repeat itself, but it often rhymes.” If we’re hit with a bout of stagflation, look for best-of-breed financial institution JPMorgan Chase & Co. to benefit from policy decisions. 

In 1979, a year in which inflation ran 11.3%, President Jimmy Carter appointed Paul Volker to run the Federal Reserve to “slay the inflation dragon.” Volker’s Fed did the unthinkable, pushing federal interest rates briefly above 20% (mortgage rates reached as high as 18.5%)!

While it’s unthinkable to believe that rates will have to be raised anywhere near that level, what is clear is higher rates help banks across the board. 

Conceptually, it’s easier to think of banks as “spread managers” in their core banking functions. They pay depositors interest on their short-term checking and savings accounts, while lending the money out at higher rates for longer-dated car, home, and personal loans. 

The difference earned between these two rates, or spread, is what’s referred to as net interest income. Because rates tend to rise more with duration (length of loan), banks generally benefit from rising rates as the net yield expands.

For the last few years, the exact opposite has occurred, and JPMorgan has seen its net interest income continue to decline. In the quarterly report released this week, the company announced that it expects net interest income of $52.5 billion, down $2 billion from the prior year on account of continued falling rates. 

However, in a bout of good news, this figure beat analyst expectations during the quarter as the recent uptick in rates helped results. As rates increase across the board—as they have been in recent months—look for JPMorgan’s net yield to rise and for the stock to benefit. 

Stagflation isn’t all good news for JPMorgan. Slowing economic growth could hurt both the company’s corporate and personal loan portfolio, if loan defaults pick up, along with non-interest activities like IPO and bond underwriting. The latter of which is becoming increasingly important: as of the recent quarter, non-interest revenue was 56% of JPMorgan’s total top line. 

However, the bank has its pick of the best borrowers with strong personal balance sheets. As such, JPMorgan’s loan portfolio will hold up significantly better than regional and local banks. 

As a bank, the company will mostly be inoculated from rising costs due to global supply chains and other input cost increases. The financial sector should do well in an inflationary environment, but JPMorgan remains a best-of-breed pick in the sector.

ExxonMobil (NYSE: XOM)

ExxonMobil still has room to run

  • ExxonMobil (NYSE:XOM)
  • Price: $63.12 (as of close Oct 21, 2021)
  • Market Cap: $265.402B

Let’s get this out of the way: ExxonMobil’s execution has been lacking for years and shares now sit 20% lower than they did a decade ago. The company has been faulted for being slow to embrace green energy and doubling down on fossil fuels, which have become more expensive to extract and discover while prices remain stagnant. 

The last few years have seen the limits of Exxon’s myopic strategy. In the last year, management had to issue billions in debt just to pay its dividend and maintain its status as a Dividend Aristocrat. Even so, it still lost an embarrassing board proxy vote against small activist investor Engine No. 1, despite the latter only owning 0.2% of Exxon shares. 

Still around? Good. Against that backdrop, you might not expect that ExxonMobil is one of the best-performing stocks in the S&P 500 this year as shares have advanced nearly 50% year-to-date (on top of a juicy 6% dividend yield). 

The company is taking advantage of the recent reversal in natural gas and oil prices, both of which have doubled in the last one-year period. Commodity producers like oil have a long history of being able to outperform in an inflationary environment and this time is no different. Simply put: your pain (at the pump) is Exxon’s gain.

There are reasons to believe oil prices will remain elevated. As noted earlier, the stagflation of the 1970s derived from oil shortages and price spikes when a faction of OPEC countries decided to embargo exporting oil to the United States for political impact. 

For different reasons, OPEC again decided to limit production for price stability last year amid plummeting demand. While there has been some agreement to raise production levels, OPEC appears to want to keep prices at higher levels to make up for lost revenue during the pandemic. 

The winners under this scenario are the large integrated majors like ExxonMobil that can take advantage of all facets of rising prices for oil, gas, and the various chemical distillates. In the second quarter the company reported a $4.7 billion profit—a significant improvement over the $1 billion loss in the year-ago period. While its debt level remains elevated, it appears Exxon is out of the woods and will be able to continue paying its dividend.

It’s unlikely ExxonMobil will experience the negative effects traditionally associated with stagflation. Normally, a slowdown in economic activity would result in less demand for oil, but the pandemic wasn’t a normal economic environment. America and the world will continue to reopen and resume travel, which should rise from current lockdown-era levels even if the economy slows.  

Instead, the biggest argument against ExxonMobil is that the company missed the boat on embracing clean energy and new technologies like EVs will impact future results. While admittedly this would be a positive for the environment and climate change, the simple fact is a shift away from fossil fuels will take much longer than most people expect. 

In fact, the International Energy Agency estimates that the global demand for oil could rise to 104.1 million barrels per day in 2026, up 8% from 2021 levels. And even then it isn’t that demand will crater. Instead, experts forecast a plateauing and slow decline from 2030 onwards. This gives ExxonMobil ample time to pivot to new means of energy production. And the company has the scale and knowledge to buy or build a clean-energy business. 

That 70s market

Stagflation might sound funny, but the consequences are serious. The word is a portmanteau for slow/sluggish growth, aka stagnation, and inflation. This condition doesn’t happen often—most recently in the 1970s—but the latest conditions are hinting at a return. 

After the consumer price index rose at a 5% (or more) annual clip for four straight months, Fed Chair Jay Powell admitted inflation has been elevated longer than anticipated. At the same time, growth forecasts continue to be downwardly revised, most notably by Goldman Sachs—its third consecutive month of cuts.  

In a nutshell, stagflation is bad because policy choices are limited. Normally, inflation and economic growth move together, which makes policy choices directionally in alignment—under stagflation, they aren’t. This makes policymakers choose between raising rates to beat inflation, which further limits growth, or letting inflation continue to spiral in hopes the economy will pick up. 

If history is any indication, stagflation could continue for the foreseeable future. The stagflation of the 1970s was driven by a “supply shock” of steepening oil prices (at that time, we were more dependent upon imported oil). The good news is that we now produce more oil and natural gas domestically (see: stock No. 3), but the downside is we manufacture much less of everything else we consume. 

The import supply chains broke during the COVID-19 pandemic and we’re now in a situation where thousands of ships full of goods are piling up at ports. Therefore, our “supply shock” isn’t just oil but everything else and it’s unlikely our Federal Reserve can fix this through monetary policy, at least in the short run.  

Stagflation Returns 

We’ve established that stagflation is terrible for the economy, but what about investing? 

As you might have noticed, stocks don’t always follow the economy (the pandemic being a recent and salient example). Economic activity fell off a cliff while the stock market exploded. Meme stocks like AMC Entertainment and GameStop continue to struggle operationally but have seen their stocks “moon” as message board traders buy shares hand over fist.

Unfortunately, stagflation isn’t one of these times. The chart below gives returns for the S&P 500 during the years 1973-1982, generally known as the stagflation era. At first glance, the S&P 500 returns are on the lower side with an average yearly return of 3.6%. 

Considering inflation during the average year was 8.8% during that period, the real return (read: returns above the level of inflation), this was one of the few long-term periods in American history in which stocks did not beat inflation. 

If one considers inflation as the “hurdle rate” of returns—which makes sense because the key reason to own stocks is to offset the impact of inflation—the stagflation era was a terrible period for stock returns. 

Put another way: the S&P 500 not only underperformed its long-term growth rate of 10%, but shockingly provided negative real returns in half of the decade!

If you feel stagflation will continue, it’s clear you must be smart with your investments. At a high level, it’s a good idea to avoid stocks that are highly exposed to global supply chains and economically sensitive companies unable to pass along rising costs to consumers. 

This is why we recommend these companies with strong brands and revenue models aligned with inflation. They could be savvy investments for our stagflationary times.

The post 3 Stocks to Buy for Rising Inflation and Slowing Growth appeared first on Millennial Money.











Share this article:

Continue Reading

Precious Metals

Why Authoritarianism Must Prevail

Why Authoritarianism Must Prevail

Authored by Robert Wright via The American Institute for Economic Research,

Freedom anywhere is a threat…

Share this article:

Why Authoritarianism Must Prevail

Authored by Robert Wright via The American Institute for Economic Research,

Freedom anywhere is a threat to authoritarianism everywhere. That is why authoritarians must destroy all freedom and why liberty lovers, and even the merely “lib-curious” (liberty curious), must not just resist blatant authoritarianism, but reject it in all its guises. The fate of the nation, and the world, again hangs in the balance.

To the extent that any freedom persists, authoritarian diktat can be subverted, albeit at a cost. History is rife with examples of bizarre entities, like nonbank banks (I kid you not!), rent-a-banks (ditto!), and gold caches, designed to work around branching restrictions, usury laws (maximum interest rates), the criminalization of holding gold, and sundry other attempts to limit financial freedom. (See my Financial Exclusion for details.)

To squelch “undesirable” activity, like increasing bank competition, voluntarily lending/borrowing small amounts of money at rates commensurate with the attendant costs and risks, or trying to protect one’s family against fiat money inflation, government must outlaw the workarounds too. To get their way, statists must suppress all unapproved activities, which ultimately means forcing would-be innovators to obtain permission before they can lawfully engage in any new activities.

Consider, for example, recent calls to allow the IRS to monitor essentially all bank accounts in the country. Maybe Americans will accept it, if, as claimed, the power is only used to enforce current tax laws. But if tax rates rise appreciably, as it seems they will, given the current administration’s policy goals, or if the transaction information is used for partisan political purposes, or to shame or coerce people into buying this, or not buying that, Americans will begin to search for workarounds. To the extent that the workarounds prove successful, government will be forced to outlaw the workarounds too.

For instance, if workers ask their employers to pay them in Federal Reserve Notes or Bitcoin because they believe that the transaction costs of making payments in those media will be less burdensome than giving some party hack access to the most intimate details of their lives, the government may well force employers to pay workers only in USD and only via bank transfer. It might even ban cryptocurrencies entirely, or at least try to.

Workers might then make one payment per month, to a “bill paying service” that for a fee will pay their bills for them, out of its one, giant bank account. Oh, but that sounds like an unregulated bank taking uninsured deposits so those services will have to be suppressed as well, or perhaps replaced by the central bank.

People may then begin paying everything by credit card, and even direct their employers to repay their credit card issuers directly. Next thing you know Uncle Sam will want to see your credit card statements too. Ditto PayPal, Venmo, and any other fintech apps used to make or receive payments. Thus a seemingly innocuous request to see bank accounts for tax purposes becomes the excuse for full-blown financial repression. This will, as always, hurt the poor the most.

Employers might work around those laws, along with the tax code and vaccine mandates by converting their employees into volunteers and donating payroll to a nonprofit charity with the singular mission of ensuring that the “volunteers” receive “donations” that happen to match the value of their former compensation. Imagine the chaos if every employer simultaneously did that! Government would have to respond by tightly regulating, if not outright outlawing, charities and volunteer work. Our liberty would be truly lost at that point, and again the poor would suffer most.

Corporations shouldn’t be taxed, but they are. Many of the largest have engaged in (international) tax arbitrage by adroitly shifting headquarters, production facilities, and charters between different states, provinces, and countries. Governments are now fighting back by establishing a global minimum corporation tax. How long before some entity begins to offer oceanic or orbital (then moon, then Martian) charters as tax havens? Soon after, though, private space flight and oceanic colonization will likely be banned or heavily restricted.

Everyone should be aware that if an international gold ETF issuing bearer shares, Honeypot.xxx (a sex worker-owned substitute for OnlyFans), a parallel university system, or anything else of import that runs against the woke or statist grain begins to gain commercial traction, regulatory hammers will swiftly bludgeon the innovators into compliance, or out of existence.

Were that all! When statist solutions to perceived “problems” create real problems, the call inevitably goes out for yet more government. When pressed about how to pay for UBI (various universal basic income) schemes, for example, schemes that are purportedly needed to solve a nearly nonexistent income disparity “problem,” proponents will sometimes argue for the establishment of a Sovereign Wealth Fund (SWF, or a giant investment fund owned by a government), the dividends and realized capital gains of which can be divided equally among the citizenry. 

UBI proponents are not sure where the money to fund the SWF will come from, or if it is a good idea to concentrate all that economic and political power in one decision maker’s hands, but if you want to see their true colors, ask them why individuals cannot simply invest their own money for themselves. Turns out that elites believe that most Americans don’t know how to invest properly, in the “right” (which is to say Left) companies. So look for a push to outlaw individual investment in favor of a SWF-funded UBI, or at least a narrowing of choice to SEC-approved ESG funds. You may still own something in 2030, but it seems increasingly unlikely you will be happy.

America and the rest of the West have been sliding down the slippery slope of statism for so long that they are now rapidly approaching the precipice that ends in rock bottom. Will liberty be crushed and a new dark age commence? Or will the masses then finally see governments as the problem, rather than as the solution?

Tyler Durden
Fri, 10/22/2021 – 21:00






Author: Tyler Durden

Share this article:

Continue Reading

Economics

The ‘Maestro’ Is Why Jay Powell Keeps Seeing (inflation) Ghosts

See, this is backward. And while it may seem overly pedantic, getting it right is actually a crucial insight (lack thereof) into pretty much everything….

Share this article:

See, this is backward. And while it may seem overly pedantic, getting it right is actually a crucial insight (lack thereof) into pretty much everything. Its purpose is to maintain a different sort of money illusion (the original relates to how workers focus on nominal rather than real levels of compensation). This other money illusion relates to the hidden nature of money itself.

We’re told central bankers are it, therefore everything must be related to central bank monetary policy. If the dollar’s falling, the Fed accommodated. If it’s rising, Fed tightening. Rates go down because, everyone says, Jay Powell bought bonds. Yields go up because of rate hikes after the bond buying is over.

You go to the bathroom in the middle of the night, the FOMC must’ve voted for it.

It all goes back to before Greenspan, though it was the “maestro” who most clearly articulated the gross illiteracy and unsupported conceits behind much of Economics.

CHAIRMAN GREENSPAN. It’s really quite important to make a judgment as to whether, in fact, yield spreads off riskless instruments—which is what we have essentially been talking about—are independent of the level of the riskless rates themselves. The answer, I’m certain, is that they are not independent.

Risky spreads are, according to this view, in a sense controllable from monetary policy even from only the short end. Why? Because all riskless rates, Greenspan also said, were nothing more than a “series of one-year forwards.”

It was, in theory, all so easy and neat; the Fed from its single position could conduct all the instruments in the symphony as it wished, however and whenever wished. Thus, maestro.

Why, then, all the constant “conundrums” and “inflation puzzles” ever since? Dear Alan said he was certain, and he’s certainly been wrong.

The yield curve is no series of one-year forwards, nor are risky spreads utterly dependent upon hapless Economists at the Fed (see: swap spreads, as a start). Those at the Fed instead have repeatedly shown they have no idea how even short run interest rates work (see: SOFR) which means they can’t be literate in money like economy.

What do they do?

Influence public opinion via financial media. To wit:

The unquestioned assumption embedded here is palpable anyway; nominal rates are rising (“worst year for fixed-income since 2005” BOND ROUT!!!!) because inflation is “hot enough.” Reported like its some foregone conclusion, this inflation certainty dictated to the bond market via a suddenly hawkish Federal Reserve.

This is, at best, incomplete; most often, just plain backward. Thanks, Maestro. 

Had the yield curve behaved recently like it had earlier in this same year, this would be plausible. The yield curve, on the contrary, is performing very differently negating any chance for this to be the case.


Bond yields aren’t reacting to anything; they’ve helpfully sorted CPI’s for us all along. As I wrote earlier today, the yield curve has expertly, consistently interpreted the money Economists and central bankers can’t understand so as to accurately predict – for longer than a century – what is and will be inflation.

This often leads to conflict; central bankers say it’s one thing and bonds declare another, often the opposite. This differing viewpoint not just a post-2007 development, either, also noted today, bonds vs. Economists has been a one-way contest going back before 1929.

Our current case, therefore, very much like previous cases.

A flattening yield curve, conspicuously so, is the bond market recognizing: 1. It isn’t inflation, just transitory price factors, meaning lack of heat in the economy; 2. Policymakers repeatedly have shown they have no clue how or where to even begin figuring one way or the other; 3. Because they are clueless, they have likewise displayed a consistent tendency to make egregious forecast errors, such as 2018 or 2013; 4. Therefore, very much independent of the Fed, bond yields are instead disagreeing with Powell’s mistake by pricing a scandalously flattening yield curve with nominal rates already contradictorily low (tight money).

Bonds – not the Fed – have already sorted the inflation question. The problem is, as usual, the answer isn’t to the liking of mainstream Economics which can only interpret yields from the “certitude” of Greenspan. In that sense, inflation is a foregone conclusion. In the dream-world of media, the theme this year is solidly inflation. In monetary reality, unambiguously deflationary.

Just in time for Halloween, Jay Powell is back to seeing ghosts.

 










Share this article:

Continue Reading

Trending