Five years ago, I created Dividend Stocks Rock. The idea was to build the most comprehensive and effective dividend investing platform. Throughout the past five years, our portfolios have done very well (see for yourself). A key part of this success is attributed to asset allocation.
For our Canadian portfolios, we went against the current and diminished our energy position to a minimum. To this date, I’m still not a fan of energy dividend stocks. I keep a very small amount of companies on my watch list.
On the opposite, I’m a big fan of both consumer defensive and consumer cyclical stocks. The first sector adds stability to your portfolio and provides investors with steady dividend growth. The latter is all about growing through healthy economies. A mix of both was definitely a winning strategy for the past five years. Here are five of my favorite consumer (defensive or cyclical) companies on the Canadian market.
Metro operates over 600 grocery stores under banners such as Metro, Super C and Food Basics. It is mainly active in Quebec and Ontario. Metro also has a pharmaceutical sector operating 250 drugstores under banners such as Brunet, Clini Plus, and Pharmacy & Drugs basics. Finally, Metro operates a pharmaceutical distributor named McMahon, which has about 200 affiliated pharmacists. Metro completed the acquisition of Jean Coutu in May of 2018.
Metro has put a strong emphasis on its private-label brands which sell for 20% less than original products. In a world where price is the first consumer driving decision factor, this is a key advantage. We like the recent acquisition of Jean Coutu as we believe it will give additional stability in Metro’s business model. Plus, the company has the possibility of unlocking values to shareholders by spinning-off its real estate business. Metro is well established in two provinces with strong economies; Quebec and Ontario. Metro is also pushing its online services to gain additional customers.
Magna International (MG.TO / MGA)
Magna International is more than an international automobile part supplier; it also designs, develops, manufactures, assembles and engineers automobile parts. Magna sells to OEMs (original equipment manufacturers) across 26 countries. It offers a wide variety of 86 products that go from seating to roofing systems.
Source: MG Q3 2018 investors presentation
MG is a leader in the auto parts industry and this serves it well as many manufacturers tend to concentrate their processes with fewer suppliers, offering wider product ranges. This is exactly where Magna stands in the market. While MG relies on Detroit automakers for about 50% of its sales, the overall automobile business is looking brighter. Magna has done several partnerships with European manufacturers. Finally, there is a high switching cost for automakers to change manufacturers such as Magna. This makes its niche a highly repetitive and stable market.
Intertape Polymer (ITP.TO)
Intertape Polymer Group manufactures and sells a variety of paper and film-based pressure-sensitive and water-activated tapes, polyethylene and specialized polyolefin films, woven coated fabrics and complementary packaging systems for industrial and retail use.
Source: August ITP investors presentation
With the rise of online shopping, the packaging industry should benefit from this tailwind. ITP expects to reach $1.5 billion in sales by 2022. Intertape is #1 and #2 in its main market in North America and shows international expansion opportunities. Management also expects to grow by acquisition to expand its current line of products, consolidate its activities, and open additional doors in international markets.
Andrew Peller (ADW.A.TO)
Andrew Peller owns wineries in British Columbia, Ontario and Nova Scotia. The company is definitely part of my favorite consumer defensive stocks on the Canadian market. ADW not only produces its own wine, but also markets it along with other products. It owns several brands like Peller Estates, Trius, Hillebrand, Thirty Bench, Sandhill, Copper Moon, Kalona Vineyards Artist Series VQA wines and Red Rooster. Currently it has an estimated 14% share of its total wine market and a 37% share of domestic wines.
Andrew Peller is known to grow its revenues through acquisitions. Since 1995, management invested over $114M to purchase 14 vineyards. The company built a solid relationship with provincial liquor stores, but also maintained company-owned retail stores in Ontario. In late 2017, it acquired 100% of three estate wineries located in British Columbia’s Okanagan Valley. ADW used $79M from its credit facility to complete those acquisitions.
Alimentation Couche-Tard (ATD.B.TO)
Alimentation Couche-Tard is the largest convenience store operator in Canada and 2nd largest in North America. While constantly expanding its presence in the US and Europe, it successfully built a convenience store including daily use products. Many stores are also combined with fuel service stations. ATD operates 12,081 stores (7,863 in North America, 2,708 in Europe and 1,510 internationally). Instead of simply selling chips and beers, ATD focuses on a superior offer including fresh food, private labels and strong product concept offerings.
Source: Alimentation Couche-Tard 2018 investors presentation
An investment in ATD is definitely not for an income producing stock. However, if you are looking at the long-term horizon, your dividend payouts will grow in the double digits for a while and you will enjoy a strong stock price growth. ATD potential is directly linked to its capacity to swallow and integrate more convenience stores. ATD shows a perfect combination of the dividend triangle: revenue, EPS and dividend strong growth.
This list includes many low yielders. How can I build my retirement income with them?
If producing income with your portfolio is your priority, this article probably left you empty handed (besides ITP.TO). Unfortunately, there is a price to pay for quality and the first indication is often a low yield. It has become more complicated to identify safe high yielders. If you are looking for them, you might want to take a look at my latest articles covering 5 stocks with 5%+ yield.
Also, keep in mind that low yielding stocks often offer high growth potential. Take a look at the following graph and you will notice how the four low yield stocks mentioned in this article crushed the TSX in the past five years:
Disclaimer: We are long all of the above.
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