Category Archives: Seeking Alpha article

How To Choose Stocks For Your Defensive Dividend Portfolio

The U.S. market has been led by the bull for pretty much 10 consecutive years. So, it’s better to take a more defensive stance to prepare for attacks from the bear. A core component of a defensive portfolio is it can utilize conservative dividend stocks as its foundation.

Here are some tips for choosing your foundation conservative dividend stocks.

Earnings or Cash Flow Stability

Healthy dividends are paid from earnings or cash flow. So, stable earnings or cash flow generation improve the dividend safety of a stock.

Typically, utilities, REITs, the big Canadian banks, the big Canadian telecoms, and energy infrastructure stocks are good places to search for businesses that generate stable earnings or cash flow.

Dividend Safety

When checking for dividend safety, the first 2 things to look at are the payout ratio and dividend track record of the company. Typically, the lower the payout ratio, the safer the dividend.

However, certain industries like REITs and utilities tend to have higher payout ratios. So, it’s best to compare a company’s payout ratio to that of its industry peers.

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This Dividend Cut Can Be A Blessing In Disguise

Slate Office REIT (TSX: SOT.UN) cut its cash distribution by almost a half from CAD$0.75 to CAD$0.40 per unit. This frees up CAD$26 million of capital annually.

Initially, Slate Office plans to use the capital to reduce its debt levels. This will increase the financial flexibility for future investments.

Quick Business Overview

Slate Office recently generated income from 41 office properties, had a portfolio occupancy of 87.6%, and had a weighted average lease expiry of 5.8 years. These should help the REIT generate stable cash flow over the next 5 years.

Financial Health

The REIT’s recent interest coverage worsened to 2.3x compared to 2.7x at the end of 2017. Additionally, its recent weighted average debt interest rate was 4.3%. The rate had edged higher every quarter since 3.6% from a year ago.

The Dividend is Much Safer Now

Slate Office’s 2019 FFO payout ratio will be much more sustainable at ~64% based on 2018 FFO per unit. The big buffer is needed because 2019’s FFO is estimated to decline due to the reduced interests in 6 Greater Toronto Area assets. The FFO per unit that will be generated during Q2-Q4 will give a sense of the FFO generation power of Slate Office’s assets.

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This Growth Stock is Priced at a Tremendous Discount

Summary

  • Brookfield Business Partners has +30 years of proven track record in investing and managing businesses on a global basis.
  • It aims for returns of 15-20%.
  • Buying the stock on big corrections can lead to even higher returns for you.
  • The risks lie in the strong reliance on management competency and the limited partnership having volatile earnings/cash flows from buying and selling businesses. This makes it very difficult to value the stock.

What Does BBU Do?

Brookfield Business Partners LP (TSX:BBU.UN)(NYSE:BBU) acquires high-quality businesses that are either market leaders or are businesses that it can improve on by applying its global investing and operational expertise.

Ultimately, BBU believes that the businesses that it acquires will generate strong cash flow — if not now, then in the future (after it improves the operations). When a business has maximized its value, BBU would sell it and redeploy the proceeds in better opportunities for higher returns.

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