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Dividend equities can offer steady growth in inflationary times — especially now, says David Pastor of Setanta Asset Management.

The Dublin, Ireland-based portfolio manager said high-quality companies that issue dividends tend to be safe bets in turbulent markets.

“There’s an element of ‘bird in the hand’ here. You’re getting your cash today, so you have that certainty that investors appreciate,” he said. “You’re also getting an element of growth.”

He acknowledged that investors who enjoy the thrill of explosive growth may want to look elsewhere, but that’s not to say dividend payers can’t be innovators. He offered examples such as New Jersey-based Johnson & Johnson, which developed vaccines during the Covid pandemic; South Korea-based Samsung Electronics Co.; and Taiwan-based Taiwan Semiconductor Manufacturing Co. Ltd.

“These are highly innovative companies,” he said. “Dividend equities, we believe, are right in the intersection between quality, value and growth. So, these companies, we expect them to offer the right kind of returns, perhaps with a smoother ride in terms of volatility.”

Pastor said finding good dividend payers is a bottom-up process, heavy on research and analysis. Among other things, he looks at the history of the company and the basis of its competitive advantage.

“We look at measures of margin, return on capital, how those have evolved over time, indebtedness, measures of margins — all of those give you an idea of the quality of the company,” he said. “Then, in terms of how all that translates into a dividend payout, we try to understand the capacity and the commitment of a given company to pay a dividend.”

He said there is no “magic number,” but the dividend should be consistent, sustainable and calculated thoughtfully.

“You want a good business that almost runs by itself,” he said. “But you also want talented and responsible management, who is going to allocate the capital that they don’t distribute in the form of dividends prudently, and be able to exploit the opportunities for growth that the company may have.”

The best bets are well-established names.

“These are not fledgling start-ups. They are known by the market,” he said. “We expect — and the market expects — these companies to do better than the average, in terms of drawdowns.” Furthermore, well-known companies can usually pass on price increases, which is beneficial in times of high inflation, he added.

Pastor likes Georgia-based The Home Depot, Inc., which benefited from the increased demand for renovations that occurred during the pandemic.

“The market is still digesting some of that. Not just the market, but the company as well,” he said. “Earnings are expected to come down this year. But the long-term trend is still very favourable for Home Depot.”

He also likes Ireland-based CRH plc, a construction-materials producer with about 50% of their sales coming from the U.S., where infrastructure spending is on the rise. “We’re hoping for a very sustainable return there, driven by dividend growth in the company,” he said.

The energy transition is also supporting companies like Illinois-based Exelon Corp., an owner of regulated utilities in the U.S., and Swedish copper miner Boliden AB.

“We see long-term opportunity in the energy transition,” he said. “Exelon is expected to benefit from investment to electrify homes and upgrade the grid. And what we like about Boliden is its risk-averse culture, and the geographies where it seeks to own assets for the energy transition.”

He believes long-term opportunities also exist in the hearing-aid industry, which has only four main players. “There are high barriers to entry and it’s obviously enjoying long-term growth, driven by [an] aging population,” Pastor said.

The hearing-aid company he likes best is Switzerland-based Sonova Holding AG. “It’s a market leader,” he said. “We see a very long, long opportunity for dividend growth.”

Pastor said an allocation to dividend equities would make sense for most portfolios.

“What we can point to is the strong track record of dividend equities, attractive dividend payments, good dividend growth, and the ability to protect against inflation,” he said. “Over the long term, we think dividend equities still offer a strong value proposition, deserving of a place in a client’s portfolio.”


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

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