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’re talking about dividend investing with Brenda Nicholls, assistant vice president and portfolio manager with Mackenzie Investments. We talked about dividend equities as a hedge against inflation, names she likes, and we started by asking about the current state of play for dividend equities.

Brenda Nicholls (BN): Admittedly a number of dividend payers have had a tough run this year so far. When you look at dividend yield as a factor, which refers to those equities with the highest absolute dividend yield in aggregate, they actually have a negative year-to-date return, down almost 5% if you source Morgan Stanley’s factor data. Utilities across the market cap spectrum have been universally poor performers this year. Larger-cap financials have relatively outperformed small- and mid-cap financials, while large-cap staples have underperformed small-cap staples. This rising-rate environment is very much a competitive factor for dividend yield, as investors can now earn over 5% on a one-year T-bill. This competition for capital and 3% rate of inflation means we are very focused on dividend growth and not just a high absolute level of yield.

Dividend equities as a hedge against inflation

BN: I’d say the reviews are very mixed. Inflation in the U.S. peaked in June of 2022, at just over 9%, fell to 6.5% at the end of last year, and is now currently just over 3%. If you were in utilities, you would have received a roughly 3.4% dividend yield, assuming you’re in the S&P 500 utility sector. But your capital return year-to-date would have been a loss of over 10%. Defensive telecom — like AT&T [Dallas, Tex.-based AT&T Inc.] and [New York, N.Y.-based] Verizon — have high absolute dividend yields but are down double digits year to date. Industrials, on the other hand, have returned almost 9% year to date. And the yield on those, while lower on an absolute basis, will grow by 5% between now and the end of the year, so that’s clearly acting as an inflationary hedge. And then energy — again, the S&P 500 energy sector — has a 3% yield and, again, that yield is expected to grow by 6% by the end of the year, again, hedging inflation. So, I think it depends on where you’ve been invested. To really think about hedging inflation with dividend equities, you really should be making that assessment over a full economic cycle.

Name she likes

BN: So, Parker Hannifin [Cleveland, Ohio-based Parker Hannifin Corp.] is an important holding for us. They are in the industrial sector, so clearly cyclicality can be a factor. But they are increasing their aerospace exposure, which increases their revenue resiliency. And it has a number of company-specific initiatives driving their margins structurally higher. And then two-thirds of their portfolio enables clean technology. So, we feel the runway of demand for that is a number of years in the future. Broadcom [San Jose, Calif.-based Broadcom Inc.] is another favourite of ours. They have a 2.1% dividend yield currently. They are the number one player in the custom semiconductors market. And their Ethernet product is experiencing rapid growth, due to its enablement of AI computing. Accenture [Dublin, Ireland-based Accenture plc] is a consulting company. They help companies support their conversion to the cloud, implement AI applications, a whole host of other technological strategies. Home Depot [Atlanta, Georgia-based The Home Depot, Inc.] is another surprising name on our list — probably surprising to some people. We believe they’re closer to the end than the beginning of tough sales comps. They’re working on stabilizing their margins and cash flows. We believe homeowners are more likely to continue to renovate than move, given the increase in mortgage rates. And the stock currently supports a 2.6% dividend yield.

And finally, what’s the bottom line on dividend investing in the current economic environment?

BN: There’s two key points that I’d have for the advisors out there. First, we have research that definitively shows that from the middle of the economic cycle through to the cycle bottoming, the second-highest quintile of dividend-yielding payers is a leader of overall market returns over that time period. So that means now is a great time to be looking at adding dividend exposure to your clients’ overall portfolios. Secondly, we need to get used to being in a new higher interest rate regime, where the cost of capital is no longer free. So, that means the high quality, innovative, profitable growers that we focus on, that provide a solid balance between paying dividends and investing in growth opportunities, we believe these are the equities that will be the market winners in the years ahead. And these are the companies that can form a solid core component to anyone’s overall portfolio.

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