Making sense of the markets this week: November 2

Photo by Wassim Chouak on Unsplash

Each week, Cut the Crap Investing founder Dale Roberts shares financial headlines and offers context for Canadian investors.

Big, juicy Canadian dividend stocks are on sale

In Canada, we now have the largest spread (in three decades) between Canadian bond yields and the Canadian high dividend index.

This Globe and Mail post compared the yield in the S&P/TSX High Dividend Composite Index to the 10-year Canadian bond. The yield on the 10-year bond has fallen to 0.6%. Now that’s some slim pickings for fixed income.

From that post quoting Ian de Verteuil, a strategist at CIBC World Markets…

“‘We would never say that dividend cuts are done, but we do note that 70% of the dividends on the S&P/TSX Composite come from relatively “safer” sectors, specifically banks, insurers, pipelines, communications and utilities stocks.’”

iShares S&P/TSX Composite High Dividend Index ETF tracks that index, and the current 12-month trailing yield is an incredible 5.8%.

If we look at some of the high-dividend individual stocks, we see some incredibly large dividends as well. Both Capital Power and Power Corporation of Canada have yields of 6.7%. BCE Inc. and Manulife Financial Corp. have yields of 6% each. Enbridge Inc.‘s dividend yield is 8.6%, while TC Energy (another pipeline) offers 6%. On the Canadian banking front, Scotiabank is yielding 6.6%, TD is at 5.4%, and CIBC will deliver a 6% annual yield.

The Dividend Index, composed of 75 stocks selected because of their impressive dividend income, has fallen 12.9% including dividends. The S&P/TSX Composite Index has fallen just 2% over the same period; the juicy dividends are still out of favour.

David Berman, the author of that Globe and Mail post, summarized with…

“These are challenging times for dividend stocks. That’s what makes them appealing.”

I would have to agree. I am adding to my wife’s Vanguard High Dividend Yield ETF (VDY) when monies are available. The trailing yield for that ETF is just over 5%.

Investors seeking big, juicy Canadian dividends might also explore BMO’s Canadian Dividend ETF (ZDV) and iShares Canadian Select Dividend Index ETF (XDV).

I am eager to add to my Canadian bank, telco and pipeline stocks. But I maintain a modest position (15% to 25% of portfolio) in bond ETFs. While the yields are low, their job is to manage the stock market risk. I also hold gold and bitcoin.

Keep in mind that dividend yields are elevated due to lower stock prices, and the market’s having priced in greater perceived risks.

TD gets in on the robo game

In an attempt to lure younger do-it-yourself investors who have moved en masse to mobile device trading platforms such as Wealthsimple Trade, TD Bank has launched TD GoalAssist.

While investment products are launched with regularity, but few are truly game-changing for investors. Will TD score with GoalAssist?

We touched on the recent success of Wealthsimple when we made sense of the markets for the week of October 5th. From that post I offered…

“Wealthsimple accounted for 18% of trading accounts opening in Canada in the second quarter. And they doubled the total Wealthsimple client base from 250,000 to 500,000 in the first six months of 2020.”

And now one of the big Canadian banks wants a piece of that action.

On Tuesday, they launched TD GoalAssist, a new trading app (available for mobile devices only) that allows Canadians access to a very robust online educational platform. Investors can then complete an online questionnaire to help (make that “assist”) them in creating an appropriate investment portfolio. The app will continually monitor and track the user’s goals and progress, and it will prompt them to stay within the appropriate risk level.

On the app, investors can then trade TD exchange traded funds (ETFs) with zero commissions and have the ability to trade stocks listed on major North American exchanges. There are no investment minimums or monthly fees. Investors will pay $9.99 per trade for stocks.

Wealthsimple Trade was out first with free stock trades—a trend that took hold in the U.S. market but has been slow to catch on in Canada. Obviously, TD did not take that bait. It looks like there will be no discount brokerage price war, or rush to deliver free trades in Canada. (You can check out this post on the best online brokerages in Canada in 2020 for more on fees and minimums.)

TD GoalAssist is also taking on the accelerating Canadian robo-advisor trend. I’ve chatted with many of these investment firms and they tell me business has been very robust in 2020. Canadians are continually looking for simple and effective and low-fee digital investment solutions.

Investors who do not want to select their own stocks and ETFs can choose a robo-advisor-like option. They simply fill out a questionnaire that measures time horizon, goals and risk tolerance level to then suggest an all-in-one and comprehensive ETF portfolio. (TD recently released the TD One Click Portfolios.)

It’s ultimately up to the investor to press those buttons to purchase the appropriate TD One Click portfolio, which is different from what happens with a robo-advisor; in that case, purchases are executed by the robo-advisor.

The backbone of the TD GoalAssist program is that robust educational process featuring over 100 videos created specifically for the new app. Many online live learning sessions are also available on the TD learning centre.

What’s my take? (And, yes, full disclosure, I hold TD Bank shares in my personal RRSP account.) I like this as a shareholder and as a passionate proponent of low-fee investing for Canadians. While there are trading fees for stocks, a self-directed investor can invest in a low-fee manner with a combination of individual stocks and ETFs. The key is to limit the trading activity and keep track of the total trading costs.

Consolidation in Canada’s energy patch calls the bottom?

Just when things look like they can’t get any worse.… That may be the moment or signal that suggests that the bottom is in. Is that the case with the struggling Canadian oil and gas producers?

Oil and gas producers are laying off staff. Mergers and acquisitions are picking up speed. Investors are nowhere to be found.

In the worst times for oil in the late 90s, we saw the merger between Exxon and Mobil, to deliver the giant we now know as ExxonMobil (XOM). The bottom of the oil market brought consolidation.

These days, ExxonMobil is planning another wave of layoffs.

Canadian companies are also beginning to consolidate as the bigger and perhaps financially stronger companies scoop up the smaller companies. The new consolidated company will then also create efficiencies by combining strengths and laying off staff. Obviously that is bad news for many employees, but it is the reality of a cyclical business sector. Moving forward, we will see companies that are “leaner and meaner.”

The big news this week was the merger between Cenovus and Husky Energy. Both are considerable players. So far in 2020, Cenovus and Husky shares have lost 63% and 70% of their value, respectively.

From that CBC Business post…

“‘It will allow us to make better returns in a tougher environment, so that’s always always something we need to be looking to do,’ said Husky CEO Rob Peabody in an interview, adding it will also be easier to attract investment as a bigger company.”

Many companies are reducing their workforce to get lean. It’s likely fewer players will continue in the Canadian oil and gas space. An article in Advisor’s Edge suggests many more mergers are in the pipelines.

And more on recent deals and trends in the Financial Post…

“Like U.S. E&P [exploration and production companies], Canadian energy companies also need to come together, cut costs and become leaner to better adapt to lower energy demand in the post-pandemic world.”

They will need to be more efficient. Is this the beginning of the recovery for Canadian oil stocks? The bottom is in? There might be incredible value in the energy patch, and pessimism might be over extended.

Of course, there is also incredible risk.

I have avoided energy producers for quite some time. But I’ll admit that I am now more than interested.

It’s monster earnings week for monster tech

The tech darlings of Facebook, Apple, Amazon, Netflix and Google have been major drivers of the U.S. stock market in 2020. Of course, those famous tech stocks are known by the acronym FAANG (often described as FAANG plus M with the inclusion of Microsoft).

On the Canadian front, the largest tech darling is Shopify.

All of these companies profited tremendously from the trends advanced by the pandemic. Will that success continue? Many of those mega-cap tech giants reported earnings this week and we see them piling on more gains on top of gains.

Microsoft blew by analyst estimates for earnings and revenues. Revenue increased 12.4% in the third quarter compared to the same quarter of 2019. It’s truly astounding for a mega-cap to be able to continue to grow at double-digit levels.

Amazon beat earnings and revenue estimates. Operating income was up 94% year over year. Revenue was up 37.3% year over year.

Alphabet (the holding company for Google) breezed past estimates as well. Operating earnings increased 24% year over year. Revenues increased 14%.

Facebook beat earnings expectations with revenues increasing 21.6% for the third quarter of 2020 compared to the same period in 2019.

Apple also delivered a beat on earnings and revenues: Revenue of $64.7 billion for the third quarter increased 1% from 2019.

Shopify beat estimates with revenues almost doubling year over year. Revenue was up 96.5%. What an incredible Canadian success story. Many suggest we add Shopify to the tech giants to create that FAANGS acronym. In this column for the week of August 3, we reported that Shopify increased earnings by 97.3% for that second quarter.

FAANGS plus Microsoft still has teeth. There just seems to be no stopping these tech giants.

Monster earnings indeed, just in time for Halloween.

For the record, I hold Apple and Microsoft.

Dale Roberts is a proponent of low-fee investing who blogs at cutthecrapinvesting.com.

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About Dale Roberts

Dale Roberts is a former investment advisor and proponent of low-fee investing. He created the Cut The Crap Investing blog in 2018. Find him on Twitter for market updates and commentary, every day.

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