Dividend Stocks with Aaron Dunn
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You know, I sit around, I look at the markets, you know, I invest in the markets, etc. But one of the things that I've been noticing, and it's over a bit of time too, but I can't believe how good those dividend yields are. And Aaron Dunn of Keystone Financial, that's what he focuses on. That's what he shared with our audience. He's done other things like

Boy, we're talking about a 10 bagger with Microsoft that he put on our radar going back and also his encouragement to focus on the U.S. side of things, especially in the tech sector. But today I want to talk about some of these, well, just incredible dividend yields. Aaron, thanks for taking the time with me.

Happy to be here. Lots to talk about. Let's throw one out there. You know, I mean, I'm looking at the telephone companies and I look at, you know, sometimes they're 7%, even 8%, etc. Give us just a little background on that whole dividend situation.

Right. So so telecom is is one of those sectors that's considered to be interest rate sensitive. So certainly, you know, we've seen some some headwinds against that sector with interest rates coming up as much as they have. And there's two there's there's two reasons why. One, their dividend yields by comparison to the bond market are going to look a little less attractive when bond yields are higher.

But also these are capital intensive industries, so they have their own debt on their balance sheet. Higher interest rates, of course, means higher interest expense and lower earnings.

Looking at the telecom companies, I'll talk about Bell. I'll talk about BCE specifically. The yields definitely, they look very high. So we've been paying close attention to them. Tell us right now about a 6.5% yield and BCE about an 8.5% yield. And obviously, these are essential companies, essential infrastructure. But the issue that I have with the telecom stocks right now is that the payout ratios are high.

They're extremely high, right? So if you look at

If we look at payout ratio dividend to adjusted earnings or to earnings rather with with Telus, you know, you're about 250 percent, I think, over the last year. So that's well above, you know, the 100 percent that we would consider to be a target for us. We want to see below 100 percent. Now, oftentimes earnings aren't the best metric. Sometimes you have to go to free cash flow. But even if you go there, you're still looking about 120 percent for Telus earnings.

115% for BCE. So there's a reason why these yields are high. There is some risk embedded in there.

Now, a lot of people will ask. Yeah, sorry. I was just going to say, and that's what we're really describing. I mean, my simple question is, okay, I see a yield like that and I go, well, is it safe? Are they going to cut the dividend? And that's what you're addressing here is, well, you know, if the dividend payout is more than their earning, and as you say, secondarily, more than their free cash flow, that should be a big red flashing sign. You can decide what risk you want to take, but you know that's up in the riskier category.

No, absolutely. And that's something that you have to consider. So in the case of the telecoms, now, I'm not going to say that I think that there's a high likelihood that they're going to cut the dividend, even though the payout ratio is above 100%. Obviously, that's not sustainable long term. I think that they would be planning on growing their free cash flow into that. They are targeting getting that payout ratio under 100%, although they are also increasing their dividends. So that's making them difficult. What is really going to help

companies like Telus and BCE would be lower interest rates. So as interest rates start to decline, that's going to help them out in terms of driving more cash flow. But these are very obviously essential businesses. Billions of dollars of infrastructure across the country. People rely on

on those yields, whether they're pension plans, whether they're individual investors. So I think they're going to do everything that they can not to cut the dividend. Now, if the payout ratio stays above 100% long enough, they may not have a choice. But I think that they would look at other ways of

of maintaining the dividend. So I don't necessarily think that there's a high likelihood that the dividend will be cut, but I do think that there is an element of speculation in that yield still, just given where the payout ratios are. And that's why we're not out there saying, oh, you know, you have to buy these companies for these high yields.

you know there's there's definitely some element of risk and we don't like the model where that parent ratio is above 100 especially when there's other companies where we think you know the yields are are higher almost as high but but you you have a better financial backing um let me just i'll come back to ask you further what ones you do like but uh about the history uh the record the historical record of dividends do you look at something and you go okay

And your point's well taken about they're going to work hard to make sure they don't have to cut. I mean, these are sort of bellwether stocks, you know, foundational stocks in a lot of portfolios, even in the pension plans, that kind of thing. But do you look and say they've never cut their dividend or they've cut it three other times? Like, do you look at that dividend payout history?

Oh, no, definitely. I mean, that's one of the many things that we look at. And, you know, having a strong track record of dividends is important. You know, that said, it really comes down to, you know, what is going to happen in the future. And there are situations where markets and industries completely change. You could have a company that has a tremendous track record in the past, right?

And, you know, that falls apart in the future. But, you know, starting with history, that's where you start to get a sense of, you know, where the company's been, what the risk level is today. And then you start to extrapolate going forward and be like, OK, well, what is what is changing or what has changed? Right. Like, has that payout ratio changed?

deteriorated, has the market changed and now perhaps there's less visibility in the cash flow and the revenue. And I mean, that's really I mean, if all we had to do is look at the size of a yield to make a decision on a dividend stock, my job would be super easy. Right. But I guess if I could just use a really bad analogy here.

you know, looking at the current yield or the size of the yield, it's almost kind of like turning on the faucet in your house and seeing water come out of the faucet. It's like, yeah, you're seeing waters coming out right now, but only looking at that one point of what is a very complicated system, which is the entire, you know, water infrastructure in your city. Just looking at your faucet doesn't tell you anything about that, right? You don't know if it's modern, strong infrastructure or if it's,

you know, dilapidated infrastructure that's going to fall apart at any type of an adverse event. So, you know, really it's about,

you know, not just looking at that one point of the system. It's about looking at the entire system and making sure that you're investing in a company that is going to be able to maintain that dividend or the probability is extremely high, but also be able to grow that dividend over time and, you know, be robust in the face of some adverse events as well. Right. Well, let me come back to something you said and just say, okay, so let's,

A great explanation, by the way, and the appropriate, depending on your risk and look at the risk elements, etc. What about something you do like that's got one of those lofty dividends?

Yeah. So since we're on the topic of high dividend, there's a company that I thought would be a good stock to talk about. And this is Enbridge, not ENB. So Enbridge is the largest energy infrastructure company in North America. And if you're a believer that, you know, oil and gas are going to continue to be part of the energy solution, well, we need pipelines. We need infrastructure. So Enbridge pays a yield. It's over 7%. It's about 7, 7.5%. Good numbers.

payout ratio relative to free cash flow. And they're growing their dividend as well. Now, this is what I would consider to be a boring company. It's not an exciting stock to own. You're getting that 7% yield. They're growing their dividend at about 3% per year. But it's a company where you have good visibility in terms of the stability of the cash flow to support that dividend.

Most of the revenue is coming from long-term contracts. They're able to extrapolate out what their cash flows are going to be over the next several years to support that dividend and the growth. And when you're looking at a 7% yield, 3% dividend growth rate, we're more or less targeting a total return of

of about 10%, the 7% yield plus 3% growth rate. Now, in any given year, it's not going to be that, but in terms of a longer term expectation, that's really what we think an investor could expect from a company like that. And it's just, like I said, it's a boring business.

But it turns out a lot of cash flow. It's able to support that dividend and it's able to grow it incrementally over time. Just in terms of track record, I think it's about 50 years. It's several decades of consistent consecutive dividend growth every year.

Let me ask you about the dividend tax credit. We didn't I didn't say that up front. But again, that enhances the attractiveness of your dividends. So if I got and again, this is a broad based question. I know that. But so you're saying, you know, Enbridge pays about seven, seven point three percent, depending on the day. What is that, you know, the equivalent of in interest payments because the investor would get the dividend tax credit?

So, okay. So if, if, if, if it's in a taxable account, you know, assuming that this is not an RSP or a TFSA, if it's a taxable account, you know, I, I'm, I'm not the best, it's going to, it's going to be different depending on your, your marginal tax rate, you know, but I would say if I were to just make like a really rough guesstimate, I would say, you know, definitely over eight, 8.5%.

Now, don't take that. Don't take that for... No, no, no. I mean, obviously, because people have a variety of circumstances and their tax rate and et cetera. I mean, it can be also higher. I would have guessed that about nine, personally. Yeah, and it could be approaching nine. I mean, I'm a stock analyst. I'm not necessarily... Yeah, no, no. But the point... Tax advice, but it's going to be higher. So there's a benefit. I mean, there's many benefits to investing in dividend growth stocks relative to bonds, right? So I...

I talk to people a lot and, you know, people will say, you know, Oh, you're getting a 5% yield on this, on this dividend stock. I can get 5% on a GIC or 5% on a long-term bond. So why wouldn't I just do that? Well, you know, the main thing about a dividend stock, certainly one that is growing. I mean, if it's, if it's no growth company, fine, it's basically a bond, but we're looking for companies that are able to grow consistently that dividend over time. So you're getting that compounded growth from,

In the income stream. Right. And that's something that a bond doesn't doesn't replicate. Right. So if you take that five percent dividend today, you know, you're growing that at six percent per year, five, six percent per year. Then once we look out five, 10 years of that growth, I mean, that stream, that yield relative to your initial investment is much higher. Right. You know, over five years, probably approaching six and a half, seven percent over 10 years.

say 9%. And with the GIC, with the bond, there's no compound growth in the income stream. It's just really going to reflect the interest rate at that given time, which could be higher, lower, or the same. So you have that, you have, as you said, there's the tax advantage of an eligible dividend as well. So when you put these things together, there are many advantages to

to dividend growth stocks. And it's not just looking at the current yield. It's also balancing out the growth. Let me ask you about one that Keystone, you've featured on this program on Money Talks and with your subscribers going back a lot of years, I think over 10 years at least. But I just want an update, but it's also qualifies into what we're talking about right now. But Brookfield Infrastructure, I mean, it still has an attractive dividend and it seems to be growing that dividend on an annual basis.

Yeah. So this is this is this is an excellent story of a company that just compounds cash flow and produces cash flow over time. Right. So we our recommendation on it goes way back to 2011. And but since then, it's paid out. It's paid out about twice the original recommendation price just in cash flow to its to its shareholders.

It's increased its dividend every year. It's about $14 US in cash flow paid out over that period compared to like a 960 recommendation price. And it's still paying about a 5.5% yield today. So this is a company that it has a growth platform. I mean, it's expanding organically by investing in its assets, also by acquisition.

It's highly visible cash flow. So mostly contracted, regulated rate of return, not extremely susceptible to adverse events in the economy to maintain that distribution. And then it's growing that distribution at, you know, five to seven percent per year. Right. So, again, you extrapolate that going forward. You're getting this growing stream of cash.

cash flow basically coming into your account. And it's been a fantastic story. We think it's going to continue to be a fantastic story going forward just based on the assets that they own and some of the growth

Well, I don't want to throw curveballs at you, but do a couple ones quickly, because I want to come back to something else you said is sort of that combination where you'd look at dividend, dividend growth, but also an expectation of some capital gain too. So you got something in mind in that way.

Yeah, no, absolutely. So there's a company that we recommended last year. It's called EQB Inc. EQB is the symbol. So this is a good example of a company where we're really looking at balancing the size of the current yield to the growth. So they're a bank. They're a midsize bank, about three billion market cap.

So much smaller than the big six, but they are the fastest growing schedule and bank in North America, right? So over the past year, they've been putting out still double digit earnings per share growth. While most of the banks in Canada have been struggling even to just maintain earnings over that period. So we like this company. They set out five year growth targets before they've achieved them. Um, it's a very technology focused bank. They focus on very attractive niche markets. Um,

But right now the yield, it's only about a 2% yield, but they're growing that dividend at about 20 to 30% per year. Right. So if you think of like the rule of 72, you take 72, divide that by the growth rate, and that's the number of years for the dividend to double. You're basically doubling the size of the dividend, you know, roughly around three years. Right. Yeah.

Let me, you know, about 25% growth. So strong, strong valuation, great growth profile. Yeah, this, this is a company that we think balances the two well. I just want to remind people Keystone Financial, you sort of split up what you're doing. And again, forgive my, my definition or my observation, but, you know, you started as identifying companies.

All sorts of stocks that were under the radar. Pension funds weren't buying them, had a terrific track record, continue to do so. And several years ago, you said, well, what about growth with dividends, et cetera? So I want to make sure people understand Keystone Financial focuses on both. And you're in charge of this end. We have Ryan on with us, Ryan Irving, who concentrates with your staff. And it's not just the two of you, but with your staff looking all over. But this is one of your areas of expertise that you focus on.

And I just think, you know, go to keystocks.com, keystocks.com, and you can find those. Aaron, let's finish off with one more. And it's something that you talked about at the World Outlook Conference, and you have before. You initiated coverage a few years ago. But, you know, kind of we're in a market where gold is –

creating a lot of ripples, people are attention grabbing, you know, and you talked about Dynacor and it has a dividend also. So I thought maybe, you know, throw that at you.

Yeah, so this is another great example of balancing the current yield with the future growth. So Dynacor, the symbol is D-N-G. So this is a small cap company. It's our preferred gold recommendation. And they're not a miner. They actually process gold ore. So they have a facility. They're based in Peru. Strong track record.

Lots of profitability. It was actually in 2018, shortly after our original recommendation where they initiated their first dividend. Since then, over the past five to six years, they have more than tripled

the size of their dividend just in terms of growing the dividend on an annual basis. And this is supported by the underlying cash flow. So good, healthy payout ratio, net cash on the balance sheet. So they're not really hindered by the higher interest rates.

Right now, you know, they're paying a yield of about the stock price has come up. So they're paying a yield of about 2.5%. But again, when we look out into the future, their ability to grow that dividend, certainly if you're a believer of strength in the gold market, that's going to be that's going to be a real tailwind for them. But again,

If even if you're even if gold prices don't do much, there's still opportunities for expansion. So they have three potential opportunities over the next four years to expand into three new processing facilities, as well as they've invested in expanding their current operations. So this is what we would definitely consider. You know, it's on the higher risk end of the spectrum. Again, small cap commodities. But, you know, you're getting that nice yield.

Good, fundamentally strong company, still trading an attractive valuation with excellent growth opportunities going forward. That's also one of the things I really like about the research that comes out of Keystone is that you always have the risk element. This is a risk category.

So this is, as you say, it's a smaller, higher risk kind of deal. And here's the story. Here's something, as you started right off with Enbridge, fall asleep and you're going to be just fine with this one with a six plus dividend. I always appreciated that because, of course, it's risk management. So you do what's appropriate. And Keystone outlines that for you.

So Ryan, I know you do a lot of seminars. We're going to put up the latest one coming up on our site because there's always so much value in really finding out. And you and Ryan do a great job of explaining what approach you could take, how it balances in a portfolio, all of that. So stay tuned for that. Keep an eye on it. But in the meantime, go to keystocks.com, keystocks.com. Aaron, thanks so much for finding time for us. Always appreciate it. Yeah, always a pleasure. Thank you.