BAY STREET-Canadian firms, investors upping the dividend game
* Banks, Potash, BCE, Agrium lead dividend race
* Companies, investors reap reward of blue chip stability
* Trend seen continuing as hunt for yield prevails
By Andrea Hopkins
TORONTO, Sept 23 (Reuters) - Canadian companies sick of watching their share prices languish are raising their dividends at a rapid pace, hoping to tempt investors who are tired of weak stock market returns and rock-bottom bond yields.
Potash Corp of Saskatchewan's announcement this month that it would lift its quarterly payout by 50 percent was the latest in a series of dividend hikes, which included Canada's biggest banks and large cap companies as diverse as telecoms giant BCE Inc and farm-products company Agrium Inc.
The push to pump up yields, which looks likely to continue, comes as stock markets hold well below last year's highs.
The S&P/TSX composite index Canada's benchmark, is down more than 13 percent from its 2011 high, even taking into account a nearly 4 p e rcent surge so far in September.
"You increase your dividend and you are making your stock way more attractive to shareholders, especially if you know you can maintain the dividend payment. That company, that stock, will be rewarded," said Serge Pepin, director, BMO Investments.
"As far as we're concerned, the trend of inflows into this category should continue."
INVESTORS HUNGRY FOR YIELD
Given limited prospects for share price gains, the higher dividends can act as a pull for investors eager for any return.
That was the thinking at Toronto-Dominion Bank when Canada's No. 2 lender raised its dividend by a higher-than-expected 7 percent in August and surprised the market by also raising its payout ratio, which is the amount of profit it sets aside to pay out as dividends.
TD Chief Financial Officer Colleen Johnston said the move was prompted by investor feedback.
"Dividend yield is really highly valued in this low interest-rate environment, and that was certainly an impetus for us to increase the payout range," she told Reuters.
Indeed, with 10-year Canadian government bonds offering a paltry 1.86 percent yield right now, TD's 3.8 percent dividend yield shines in comparison. Canadian investors also benefit from a tax credit on dividends paid by domestic companies.
"With interest rates very low, the alternatives are cash and bonds, and I think if you look at the yields - if you can assume the risk - dividend-paying equities can become very attractive," said Robert Stodgell, a chartered financial analyst at Stodgell Investment Management Ltd in Toronto, whose stock investments typically carry dividends.
TD was not alone in its thinking. All five of Canada's largest banks raised their payouts in the quarter, surprising analysts who had expected two or three at the most.
"DEAD MONEY DEBATE"
Meager stock returns come despite strong profits at many Canadian companies, where executives who got their houses in order in the wake of the financial crisis found themselves sitting on cash even as their share prices wallowed.
Indeed, Bank of Canada Governor Mark Carney last month took Canadian companies to task for sitting on large amounts of cash, saying they should invest this "dead money" or return it to shareholders.
Financial advisors noted companies that are actively raising dividends are also sending a signal to the market that they are big enough, with reliable cash flow, to weather volatile markets.
"If a company has that fiscal discipline of paying a dividend, it usually bodes well that you can survive the more turbulent times, and if you can survive the more turbulent times well, you'll end up pretty well long term," Stodgell said.
Still, the dividend game is not risk free for either the company or the investor. Cutting or skipping a dividend payout is a black eye for the company, and investors will generally punish the stock if the payout is trimmed.
So while dividend-paying funds - often grouped into equity income funds - have attracted more flows than pure equity assets, they have still lagged bond and money-market funds, according to research firm Investor Economics.
Net flows into Canadian equity funds have been negative since 2008, with income funds as the only bright spot. So far in 2012, there have been C$3.67 billion in net redemptions from equity funds, but inflows of C$3.92 billion into equity income funds, demonstrating the appetite for funds where dividends do the work.
The flows fall well short of the C$21.54 billion that has moved into fixed-income funds so far this year.
Fresh U.S. and European central bank action in recent weeks has helped boost the appeal of riskier shares. But BMO's Pepin said he suspects that investors - many in or approaching retirement - will favor those shares and equity funds offering a payout.
"There is still some nervousness, so investors will be looking for the safer vehicles - the blue chip companies, the dividend-paying companies. These are the areas that will reward investors."
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