Business planning

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Economic conditions look right for a return to form for dividend-paying stocks, says Darren McKiernan, vice-president of investment management with Mackenzie Investments.

McKiernan said investors realized about 15% of their returns from dividends over the last decade. That’s a far cry from the 120-year average, when dividends accounted for 40% of investor returns. Despite that performance, however, he remains an advocate for dividend-paying stocks.

“We just went through a really fallow period for dividend investors,” he said. “But even in that period we were able to generate good solid double-digit returns. And our view is very straightforward. All we need is for the world to look a little bit more like the last 120 years than the last 10 — and all signs seem to indicate that’s going to be the case. Then, any allocations to dividend-paying stocks would be a very reasonable and prudent thing for any investor who’s got a time horizon that extends beyond the next couple quarters.”

He said the fiscal response to the pandemic is proving helpful to dividend payers that benefit from inflationary conditions.

“Coming out of Covid was a somewhat unique period of time,” McKiernan said. “You had this huge amount of pent-up demand because of the fiscal and monetary stimulus that was going on — not just in U.S. but across the world — and consumer balance sheets were in really great shape. They had excess cash.”

This, combined with government spending, gave rise to inflationary conditions, and central banks are now raising interest rates in response.

“Not all dividend-paying companies are created equal when it comes to a rising-rate environment,” he said. “You have to avoid the big swath of the investment universe that might be disproportionately negatively affected by rising interest rates.”

Nonetheless, McKiernan has found strong dividend payers in the following sectors:


McKiernan likes Roche Holding AG, based in Basel, Switzerland. Roche is a pharmaceutical company that specializes in oncology, and has raised or held its dividend for 45 years in a row. He also likes ADVI Health LLC, based in Washington, D.C.; and Johnson & Johnson Services Inc., based in New Brunswick, New Jersey.

Natural resources

Glencore plc, based in Baar, Switzerland, has great exposure to metals such as copper, nickel and cobalt, McKiernan said. These metals are in high demand as they are used in the electrification of the grid and in electric vehicles.

“We don’t know exactly what the price of these metals is going to be in two or three or four years’ time or five years’ time, but we think odds are it’s probably going to be higher than lower,” he said, “as the world transitions to a more green consumption environment.”


McKiernan said U.S. banks currently have good yields and will benefit directly from rate hikes.

“There’s actually a rough rule of thumb when it comes to interest rates and earnings growth or earning sensitivity: for every 100 basis-point increase in interest rates, you can add 15% to earnings, certainly, when it comes to the U.S. banks,” he said. “And if the Fed pushes the economy into recession, that’s going to act as a somewhat countervailing force.”

Real estate

Real estate investment trusts are viable bond proxies in the current environment, but he likes Crown Castle, a telecom operator based in Houston, Tex., for its exposure to communication towers. He also holds stock in Vonovia, the world’s largest private apartment owner, which is based in Germany.

“Again, this is a very defensive business, where rent increases are baked in at the beginning of each year. They are able to very much protect themselves from inflation,” he said.


The world’s biggest liquor manufacturer and distributor, U.K.-based Diageo plc, has bright prospects given its pricing power, its growth potential due to exposure in emerging markets, and market trends that show spirits continuing to take share away from beer and wine.

On top of that, its brands are market leaders. “It owns Guinness, it owns Smirnoff, Johnnie Walker, Ketel One Vodka,” said McKiernan. “Talk about a company that is resilient.”

Supply chain

He’s also bullish on railroads, particularly Union Pacific Railroad Company, based in Omaha, Neb., which is well-placed to meet supply chain challenges amid a drive to reshore foreign manufacturing.

“This is one of the few businesses in the world that can issue 100-year bonds,” he pointed out. “There’s a reason for that. Nobody’s building a new railroad through the middle of downtown Toronto. It just doesn’t happen. These are natural monopolies.”

The case for dividend-paying companies has always been strong, McKiernan said. And economic trends and strong company dispositions hint at a return to form. “These are not just dividend-paying companies, but dividend companies with track records that go into the decades of raising their dividends.”


This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.

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