Three dividend all-stars in a volatile market

The ups and downs of today’s markets have driven many investors to seek out stable, predictable income through dividends, and analyst Zachary Evershed of National Bank Financial has a few ideas where to find it.

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Stable income from property and consumer stocks

Due to the volatility of today’s markets, many investors are seeking out stable, predicable income through dividends. The Montreal-area analyst is a vice-president at National Bank as well as a chartered member of the CFA Institute and was previously responsible for special situations research. Before joining National, he spent several years working as a Scotiabank financial advisor.

Mr. Evershed has three favourite, “best buy”-worthy dividend-paying stocks that offer a steady (and elevated) income level, all listed in National Bank’s dividend all-stars portfolio for 2022.

To be eligible for inclusion in this year’s portfolio, a stock must meet three criteria: a dividend or distribution yield of roughly four per cent or greater; low risk of the current payout proving unsustainable (ideally, dividends are rising); and a generally positive view regarding the company or its share price.

Alaris Equity Partners Income Trust (TSX—AD.UN)

Alaris was added to National’s 2021 dividend all-stars as part of a mid-year rebalancing. The company provides alternative financing to private companies. Its current portfolio of partners includes companies working in industries as varied as personal fitness, mining services, technical consulting, and transportation.

“Alaris’s preferred equity financing is attractive to high-growth partner companies as it allows owner-operators to retain ownership and control, has no put right (an option to sell out within an allotted window), is tax-efficient and caps Alaris’s upside while offering modest downside protection,” says Mr. Evershed.

As of May 5, the yield on its $0.33 per-unit quarterly ($1.32 per unit annually) distribution stood at 7.055 per cent. It last increased its distribution by $0.02 a unit per quarter ($0.08 a year in October 2021 following a July announcement.

Dexterra Group Inc. (TSX—DXT)

Dexterra Group was also a mid-year replacement on last year’s dividend all-star list. The company does business in three segments: integrated facilities management, modular buildings, and accommodations and camp support for industrial crews (such as those working in mining, forestry, and energy).

Mr. Evershed asserts that the integrated facilities segment, making up 22 per cent of revenue, is set for “capital-light, double-digit organic growth as aviation and retail volumes return.” Its January acquisitions of Dana Hospitality LP (an institutional caterer) and TRICOM Facility Services (which provides custodial services) for $50.5 million will add around $135 million in run-rate revenue to the segment, the analyst estimates.

The modular buildings segment, contributing 25 per cent of revenue, will benefit from affordable housing initiatives, particularly given its existing relationships with B.C. Housing and the City of Toronto, he adds. Finally, the analyst notes that the workforce accommodations and services segment, which contributes 53 per cent of revenue, is seeing renewed interest in resource-related projects because of rising commodity prices.

“Without counting on unannounced M&A (mergers and acquisitions), we foresee roughly 17 per cent top-line growth as DXT emerges from the pandemic on the back of commercial, aviation and retail end-market recoveries.”

Dexterra pays a dividend of $0.35 per share annually.

KP Tissue Inc. (TSX—AD.UN)

KP Tissue’s stable of well-known bathroom and facial-tissue brands such as Scotties, Cashmere, and SpongeTowels and entrenched links to major retailers have secured it the top spot in Canadian market share for both categories, at more than 35 per cent each. It is also second in market share for paper towels, at more than 20 per cent. The company commissioned through- air-drying (TAD) production capacity of 70,000 tonnes at its Sherbrooke, Que. facility in 2021’s first quarter, enabling it to shift its product mix towards “ultra-premium tissue”, the analyst notes.

“With the pandemic-influenced destocking cycle having ended in mid-2021, we believe consumers are beginning to resume normal buying patterns,” he says. “Having gained an average of three per cent market share across bathroom, facial tissue and paper towels since the onset of the pandemic, KP is in pole position to capitalize on consumers replenishing inventories, supported with further pricing increases to mitigate rising costs.”

KP’s dividend has stood at $0.18 per share per quarter ($0.72 annually) since 2014, translating to a 6.112 per cent yield as of May 5.

This is an edited version of an article that was originally published for subscribers in the May 20, 2022, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

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