3 Top Dividend Stocks For 2020

Summary

  • 10 authors (including me) chose 1 top stock each for 2020.
  • I chose Pembina Pipeline as my top idea. I explain why below.
  • Earlier this month, I bought Pembina Pipeline and TD Bank for their safe ~4-5% yields and reasonable valuations.
  • I will consider buying Intact Financial in the future.

Ten contributors at Motley Fool Canada (including myself) put together a list of top Canadian stocks for 2020. My fellow colleague, Chris Liew, coincidentally chose the same top idea as me, so there are nine top stock ideas instead of ten.

My top stock for 2020 is Pembina Pipeline (TSX:PPL)(NYSE:PBA). Just like my top stock pick of Enbridge (TSX:ENB)(NYSE:ENB) for December 2019, I chose Pembina as a defensive name that pays a nice dividend. They’re both energy infrastructure companies that generate cash flow that is quite stable

From the remaining 8 names, I also like TD Bank (TSX:TD)(NYSE:TD) as a solid dividend investment, while Intact Financial (TSX:IFC) is a quality business that I’d consider buying in the future.

pretty young lady thinking

Pembina Pipeline yields 5%

Pembina offers nice monthly income and stable growth, which in combination, can deliver long-term total returns of roughly 10-13% per year.

Mick Dilger has been Pembina’s CEO since 2014 and before then, he was the company’s COO. Since 2014, the company has increased its operating cash flow per share by about 14.8% per year.

Pembina just completed the Kinder Morgan Canada acquisition earlier this month, which was ahead of schedule. Keeping its promise, Pembina increased its monthly dividend by 5%.

The forward yield is nearly 5.2% based on the higher monthly dividend of CAD$0.21 per share that will be declared in January 2020 and payable in February 2020.

Pembina has a track record of growing its profitability. It has increased its adjusted EBITDA over time. Based on its midpoint guidance, Pembina’s adjusted EBITDA per share will grow about 6.4% from 2019 to 2020.

graph showing Pembina Adjusted EBITDA from 2016-2020
Source: December 2019 Presentation (pdf), Slide 23

Pembina is a trustworthy dividend stock. It has maintained or increased its cash distribution or dividend every year since its income fund days as early as 1997. In late 2010, Pembina changed to a corporation. Since then, it has increased its dividend by almost 62%, while reducing its payout ratio over time.

The energy infrastructure company is committed to maintaining a payout ratio of less than 100% of fee-based distributable cash flow. This payout ratio is estimated to be roughly 78% in 2019, which is much lower than 2015’s 135%.

Therefore, Pembina stock has been increasing its dividend payout, while improving the safety of its monthly dividend.

TD Bank yields 4%

TD Bank is another safe dividend stock for conservative investors. Over the last decade or so, it has successfully expanded into the United States and climbed up the ladder to be a top 10 North American bank.

About 95% of its earnings mix is retail-focused and lower risk, which should result in relatively stable and consistent earnings.

The bank’s recent stunted growth — adjusted earnings per share (“EPS”) growth of 3.4% in fiscal 2019 — is a far cry from the average growth rate of 11% from fiscal 2014 to 2018. That’s why the quality bank currently offers a 4% yield, which is at the high end of its 10-year yield spectrum.

Chart
Data by YCharts

TD expects the long-term EPS growth rate to revert to 7-10%, which would double or triple the fiscal 2019 growth rate.

Consequently, now is a good time to buy some TD shares for long-term investment.

Intact Financial

Intact Financial is a home, auto, and business insurer, all in one. Its diversified business mix results in the company having the largest market share in a fragmented industry. It also has some diversification geographically — about 15% of its direct premiums written are in the United States.

The insurer is very well run. The proof? Its combined ratio tends to be in the low 90s. Additionally, it consistently beats the industry return on equity (ROE) by 5% every year, which helps drive net operating income per share growth of about 10% over time.

Earnings growth allows for safe dividend growth. Since 2006, Intact Financial stock has increased its dividend every year. In the past five years, it hiked its dividend by 9.6% per year on average.

The stock is reasonably valued, but it has run up about 42% year to date and has been in overbought territory for about half a year. So, it’s surely bound for a breather soon. Moreover, it only yields 2.16% at writing.

Total returns are a sum of dividends, growth, and valuation expansion. Two of the three parts, the dividend yield and valuation expansion potential, aren’t enticing for Intact Financial today. So, investors are better to wait for a pullback to at least $125 per share, which could very well occur in 2020.

Investor takeaway

Motley Fool Canada contributors chose nine top stocks for 2020. Right now, I’d only buy two of them, Pembina Pipeline and TD Bank, for their safe dividends with above-average yields to the market and their reasonable valuations.

In fact, I did buy both stocks earlier this month.

Intact Financial consistently outperforms its peer group. So, it’s a stock that I’d buy at a better valuation.

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Disclosure: As of writing, we’re long on the TSX: ENB, TD, and PPL.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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