Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life.

For today’s Soundbites, we discuss Canadian dividend stocks with Brad Cann, portfolio manager and vice president at Mackenzie Investments. We talk about attributes he looks for in dividend-paying companies, names he likes, and we started by asking about current market conditions in Canada.

Brad Cann (BC): The ultra-low interest rates, used by central banks to help weather the Covid shock, definitely favoured growth investments. Those conditions supported speculation in the markets from Bitcoin to GameStop frenzy. Not as friendly for the steady performing dividend stocks. Well, that’s changed now, and that’s what I like. Interest rates are now on the rise. The speculative froth in stock valuations are coming out. And the environment, we feel, is much more favourable to those stable, slightly more mature businesses which tend to pay growing dividends.

How continued volatility could be good for dividend-focused investing.

BC: In the periods where there’s heightened market volatility, we find that higher-quality stocks — those that have more resilient revenue and earnings profiles — display long-term share price volatility. Many of those tend to be solid dividend payers. And that yield component of the stocks provide an additional element of defense to help mitigate any down-side risk exposure. So, again, dividend stocks tend to be well positioned on a relative basis to weather market volatility and potential shifts in the economic outlook. One example is [Toronto-based] Hydro One [Limited], Ontario’s electricity transmission utility, whose stock exhibit those defensive qualities we just referred to.

Value-leaning sectors.

BC: The make-up of the Canadian stock market, say compared to the U.S. market, enjoys a larger opportunity set of companies in the value-oriented sectors. The U.S. market is well known for its growth-oriented companies. Our research shows that the dividend yield of the Canadian stock market has traded at a premium for a very long time, Canada has a higher market weighting or exposure in the financial, energy, and utility industries. And these represent value dividend-paying sectors, compared to, say, the very large technology weighting in the U.S. stock market.

Quantitative and qualitative factors he looks for.

BC: We don’t simply compare the metrics to the broader market. We take a rigorous approach by comparing valuations against peers, as well as examining the company’s historical valuation levels, to build a more robust investment case. What we’re really looking for are strong, sustainable business models that can survive the business cycle, and therefore can grow over time, including growing their dividend payments. More specifically, we’re hunting for companies that operate in industries with reasonably high barriers to entry and proven management teams. We look for reasonable debt levels, relative to both the equity and cash flows of the business.

Canadian dividend payers he likes right now.

BC: In the energy sector, we believe natural gas prospects are attractive as a transition fuel to the low-carbon environment. So, we feel [Calgary-based] Tourmaline Oil Company — a high-quality natural gas producer, despite its name — with a solid balance sheet and strong management team, should be an excellent contributor to our portfolio. And in the financial sector, we believe Royal Bank stock [Toronto-based Royal Bank of Canada], a long-term core holding, has retreated to a level that we find represents a good risk-reward profile for the portfolio.

What kind of returns he expects as the economy softens.

BC: There’s two somewhat related messages we like to emphasize with our investing audience. One, our confidence in the dividend strategy we employ stems from having a long-term framework to work with. The dividends we collect need time to compound into those future returns. And, two, we encourage investors to therefore use a proper time horizon —ideally seven to 10 years, the longer the better — for their equity or stock market investments. We feel our approach will yield investors with that long-term orientation, a satisfactory return on their capital, relative to other risk-reward opportunities.

And, finally, the bottom line on Canadian dividend investing.

BC: Obviously there’s several types of successful investing strategies. We feel that focusing on Canadian dividend payers is one of them, and it’s a truly time-tested strategy, proven out over many, many years. Compounding the dividends from a diversified portfolio is an excellent building block or a core for Canadian investors.

Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Brad Cann of Mackenzie Investments.

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