Welcome to Soundbites, weekly insights on market trends and investment strategies, brought you by Investment Executive and powered by Canada Life. For today’s Soundbites, we speak about dividend investing with Darren McKiernan, senior vice president of investment management at Mackenzie Investments. We talked about companies he likes and why they are expected to do well, and we started by talking about how interest rates tend to impact dividend-paying companies.

DM: Well, I would summarize that by saying it really depends on the business. You know, we own a bunch of dividend-paying companies. Not all dividend-paying companies are created equal when it comes to a rising-rate environment. And if we’re investing in, say, pure bond proxies — like think of utility, the answer would be a lot. If rates go up, there’s an indirect correlation to bond proxies and things like utilities. But we fortunately get our yields from a pretty diverse collection of businesses. Our healthcare investments have really strong yields from Roche [Roche Holding AG, based in Basel, Switzerland] which is based in Switzerland, to ADVI [a health-care consultancy based in Washington, D.C.] and Johnson and Johnson [based in New Brunswick, New Jersey], in the United States. Of course, we own energy stocks, which if anything are negatively correlated to rising interest rates, simply because of the current supply shortages. We own several stock exchanges. And, of course, U.S. banks, all of which have very good yields and benefit directly from rate hikes. The only real bond proxies that we own are two REITS [real estate investment trusts]. We own a company called Crown Castle [based in Houston, Tex.], which is actually a telecom operator in the U.S. And a German company, called Vonovia [based in Bochum, North Rhine-Westphalia, Germany], which is actually the largest private apartment owner in the world. And, again, a very defensive business, where their rent increases are baked in at the beginning of each year. So, our biggest protection in an inflationary environment is frankly to own, you know, really high-quality companies with really high margins.

What you gain when you buy dividend paying stocks.

DM: Yeah, I tell you, the last 10 years has been a very poor environment for dividend investors. In fact, if you think about what investors have got returns from, you think multiple expansion, you think earnings growth, you think reinvested dividends. The last 10 years, investors have only received about 15% of the returns from dividends compared to say two-thirds of the returns from multiple expansion. That’s been the last 10 years. Now, zoom out and look at what reinvested dividends have meant over the last 120 years. Reinvested dividends have accounted for over 40% of total returns. So, this is our pitch to own dividend-paying companies. All the world has to do is look like the last 120 years versus the last 10, and that is why you want dividend-paying companies.

What dividend-paying companies he likes right now.

DM: Well, I can tell you again, a company like Roche [Roche Holding AG, based in Basel, Switzerland] which specializes in oncology. This is a company that has raised or held its dividend for 45 years in a row. I mentioned Crown Castle [based in Houston, Tex.] the telecom tower operator. I mentioned Vonovia [based in Bochum, North Rhine-Westphalia, Germany] as an apartment operator in Germany. These are a very diverse collection of dividend-paying companies. Glencore [Glencore plc, based in Baar, Switzerland] is our only natural resource holding. Their industrial assets are very much exposed to green metals such as copper, nickel, cobalt, and the underlying demand for these metals, based on just the electrification of the grid, is… we don’t know exactly what the price of these metals is going to be in two or three or four years’ time, but odds are it’s probably going to be higher than lower as the world transitions to a more green consumption environment. Then there’s a company like Diageo [Diageo plc, based in London, England] alcohol-spirits company. It owns Guinness, it owns Smirnoff, Johnnie Walker, Ketel One Vodka. It’s the biggest liquor distributor and manufacturer in the world. Talk about a company that is resilient. Johnnie Walker’s a brand that’s been around I think 200 years, or something like that? I mean that’s about as resilient a business as you can expect. Unless people completely change habits that have been formed over the course of many, many years, this is a business that’s got pricing power, it’s got an ability to grow its top line because of its emerging markets exposure, and spirits continues to take share away from beer and wine. I’d say another interesting business: railroads. We own a company called Union Pacific [Union Pacific Railroad Company, based in Omaha, Neb.]. This is one of the few businesses in the world that can issue 100-year bonds. 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. It’s got pricing power and if there’s going to be a reshoring trend in the U.S. that’s just going to play right into the sweet spot for domestic railroad. And not just Union Pacific, but CP, CN, CSX… they’re all going to do well. These types of businesses are not just dividend-paying companies but companies with track records that go into the decades of raising their dividends.

And finally, why take the plunge into dividend-paying stocks?

DM: I’m going to basically circle back to the point I made earlier. All we need is the world to look a little bit more like the last 120 years than the last 10 — and all signs seem to indicate that 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 that’s got a time horizon that extends beyond the next couple quarters.

Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Darren McKiernan of Mackenzie Investments. Join us every Wednesday at investmentexecutive.com where you can sign up for our a.m. newsletter and never miss another soundbite. Thanks for listening.


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