Dividend stocks aren’t as lucrative as Canadians might think – even with falling interest rates

This is the moment yield-hungry investors have been waiting for. And it might be a bust.

After two tough years, the Bank of Canada finally began cutting its benchmark interest rate, including a half-percentage-point drop this week, and it’s making dividend stocks look enticing again. For many retail investors, the expectation is that these beat-up stocks will finally rebound, delivering solid market returns on top of their sizable yields.

The reality is a different story. Market performance has been a very mixed bag. Some dividend stocks are thriving, such as TC Pipelines LP and National Bank of Canada NA-T, but a number are struggling. It’s clear now that falling interest rates will not lift all boats.

BCE Inc. BCE-T is down 6.9 per cent this year, and that’s including dividends; Bank on Montreal is pretty much flat, eking out a 1.2-per-cent total return; and Nutrien Ltd. is down 7.2 per cent.

The S&P/TSX Composite Index, meanwhile, has delivered a total return of 19.6 per cent.

So many dividend stocks are struggling that the iShares S&P/TSX Composite High Dividend Index ETF, which pays a 4.9-per-cent yield, has delivered a 17.1-per-cent total return this year, falling short of the broad market.

It makes for a confusing time. For months, asset managers and market strategists have argued this is the ultimate moment to find courage with dividend stocks again. Their 4-per-cent to 5-per-cent yields weren’t enticing when interest rates rose because ultrasafe guaranteed investment certificates and high-interest cash ETFs paid the same rates, if not more. But this dynamic is starting to flip as the rates that GICs pay drop.

Because of this, the expectation is that a wall of cash would come out of GICs and cash ETFs as they expire and flow into dividend-paying stocks. In late August, research analysts at Canadian Imperial Bank of Commerce estimated there is now more than $200-billion in funds sitting in these securities.

Falling rates, “should drive investors back into Canadian dividend-paying stocks – particularly since many of these equities have performed poorly vis-à-vis the broader market over the past couple of years,” wrote CIBC analysts in a note to clients.

So why are dividend stocks, broadly speaking, still underperforming? There are two main reasons: Mining stocks, which often don’t pay high yields, are on fire – especially gold producers – and a number of dividend-paying companies face operating headwinds.

Of the top 10 performing stocks in the S&P/TSX Composite Index this year, eight are miners. And of those, all eight produce gold. Even though it’s a challenging time for many metals producers (see: lithium developers), bullion prices keep setting record highs, now hovering around US$2,750 an ounce.

High-dividend-paying stocks also aren’t a monolith.

Consider the telco sector. For many mature investors seeking yield, because there are nearing retirement or are already retired, companies such as BCE Inc., Telus Corp. T-T and Rogers Communications Inc. RCI-B-T have long been thought of as blue-chip names. But lately they have all been facing the same challenge: Canada’s immigration surge is petering out, and that’s taking away their growth driver.

Each company also has individual challenges. BCE has borrowed heavily to fund the expansion of it fibre network in order to deliver faster internet speeds, but the company recently had its debt downgraded. Rogers, meanwhile, is also loaded with debt after spending $26-billion to buy Shaw Communications Inc. – and it keeps spending, recently shelling out $4.7-billion to buy BCE’s 37.5-per-cent stake in Maple Leaf Sports & Entertainment. (The company says it has a plan to keep its debt levels constant, but the details have been opaque.)

The same is true in the REIT sector. Lately the sector has experienced a resurgence, with the BMO Equal Weight REIT Index delivering a 17.2-per-cent total return since the start of July. But in the past few weeks, there’s been a correction in some corners of this market as the euphoria wears off and investors consider whether they got ahead of themselves.

During the summer rally, some of the best performers were multifamily REITs such as Canadian Apartment Properties REIT and Boardwalk REIT, which own rental apartments. Lately, though, rents in some major Canadian cities have started falling as immigration levels moderate and the economy weakens. There is now also a glut of condos on the market in urban areas such as Toronto that compete with their rental-only properties.

The pattern repeats again and again with other sectors. Utilities such as Capital Power Corp. CPX-T and Hydro One Ltd. H-T are both doing well this year, but Algonquin Power & Utilities Corp. AGQN-T and Northland Power Inc. NPI-T are struggling. In the banking sector, National Bank, Canadian Imperial Bank of Commerce CM-T and Royal Bank of Canada RY-T are all thriving, and Toronto-Dominion Bank TD-T and BMO are not.

The lesson for investors then, is best summed up this way: When it comes to dividend stocks, a rising tide won’t lift all boats.