2 top buys for income investors

Portfolio manager Lorne Zeiler picks a US-based global healthcare stock and a Canadian preferred share exchange traded fund as his current two ‘best buys’ for investors seeking high dividend income in their retirement.

Income_InvestorsFor all the good advice available these days, individual investors can still often be the most destructive force acting on their financial plans, says analyst Lorne Zeiler of TriDelta Investment Counsel (part of TriDelta Financial) in Toronto.

At present, Mr. Zeiler is a vice-president, portfolio manager and wealth advisor at TriDelta, which he joined in 2013. He also lectures on ethics in finance at Ryerson University. He notes that years of studying investing and working in the finance industry, particularly in the investment relations and marketing end of the business, reinforced the importance of assessing clients’ specific needs.

Mr. Zeiler observes that average investors perform worse than the overall stock market and fixed-income investments, largely due to panic-inducing price drops and the changing tastes of other investors. “They’re continuously looking for the best idea at the time,” he says. “They don’t focus on what they actually need.”

For example, at present oil and gas stocks are declining in tandem with depressed oil prices, but many investors will eventually give up on the sector and even abandon their holdings in it for much less than they bought for, instead of seizing on the buying opportunity that lower prices present.

Correction likely after tech stocks’ gains

The portfolio manager describes his current economic outlook as “positive but quite cautious”, adding that a recession in the next 12 months is unlikely, but would not come as a great surprise if it does come to pass. A short-term correction or setback, on the other hand, is likely, regular, and probably even healthy, he says, especially in the face of “phenomenal” growth, as in the case of major technology stocks on the NASDAQ. “The numbers coming out of the US haven’t been great for a little while now. Europe’s been great, but it’s been obviously significantly on a rebound.

“Ultimately, we have been taking a cautious tone for a while now. We’re going to remain on that side. I don’t think the bull market has ended.”

Mr. Zeiler has trimmed his clients’ exposure to US stocks generally in response to large gains, after previously overweighting them. However, he continues to overweight healthcare stocks. “You’re seeing earnings growth, you’re seeing relatively reasonable valuations, you’re getting pretty good incomes” in what investors consider a defensive sector, he explains.

Healthcare stock JNJ top dividend stock pick

The advisor suggests that investors, particularly those seeking dividend income, may find healthcare stocks such as his first ‘best buy’ selection, Johnson & Johnson (NYSE—JNJ), a suitable addition to their portfolios.

As the largest and most diversified healthcare company in the world, Johnson & Johnson is a household name that operates in three primary divisions: medical devices, pharmaceuticals and consumer brands. Its dividend currently yields about 2.5 per cent annually. Mr. Zeiler says he considers the company a pharmaceutical firm first and foremost, however, because the largest portion of its earnings comes from that business segment.

The portfolio manager predicts sales and earnings increases across the board this year at Johnson & Johnson, but stresses that pharmaceuticals will drive growth. The company has 20 drugs in late-stage development, and seven in Phase 3 trials.

The recent acquisition of drug manufacturer Actelion alone, paid for fully in cash thanks to Johnson & Johnson’s strong operating cash flow, will add about $0.40 to earnings per share this year, he predicts.

Pref share ETF heavy on Canadian bank stocks

Mr. Zeiler singles out his second ‘best buy’ selection, the iShares S&P/TSX Canadian Preferred Share Index ETF (TSX—CPD), for similar reasons as those of the first: limited potential for loss, reasonable yield, and good potential for gain. Mr. Zeiler recommends the exchange traded fund, which pays a distribution yielding 4.6 per cent, as a good way for individual investors to acquire a decent basket of diversified preferred shares. “For an income-oriented investor, I think it’s well-priced today compared to the potential risk.”

All of the ETF’s underlying assets are Canadian stocks. The big bank stocks make up 31 per cent of the fund, the single largest segment. Other blue chip stocks in industries such as insurance, utilities, and pipelines round out the fund, meaning default is unlikely.

Since the gap between government and corporate bond yields has narrowed, preferred shares have gained market appeal. (Corporate payment obligations to preferred shareholders take precedence over common shareholders, resulting in a hybrid investment between an equity and fixed-income instrument.)

CPD is made up of two kinds of preferred shares, 30 per cent perpetual and 70 per cent fixed reset. Mr. Zeiler says both have upside potential. Distributions from fixed reset preferred shares will benefit from higher five-year rates when the rates reset, while perpetuals, which use a fixed distribution rate, will attract more investors given the flattening yield curve of long-term bonds.

This is an edited version of an article that was originally published for subscribers in the July 7, 2017, 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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