Portfolio manager recommends steering down the middle of the road
Given market volatility, heightened by the Russian-Ukraine conflict, it’s even more important than ever to balance yield and growth dividends in equity portfolios, says one portfolio manager.
“What we’ve seen very recently is the demand and drive for dividend paying equities, across the board, but definitely in North America,” Stephen Duench, Vice-President and Portfolio Manager at AGF Investments Inc. told Wealth Professional.
He noted that stepped up in January and early February, but then the war really accelerated commodities and energy became one of the bigger dividend yielders in North American markets, even as some of the defensive sectors, such as North American consumer staples, telecommunications and pipelines have done well.
“It has been very pronounced – so much so that some of the performance of these areas is like we’ve never really seen before,” he said, “and a lot of these dividend payers have commodity exposure and commodities is a new kind of hot item right now.
“There’s obviously an element of high expectation on some of them and some of them are deserved. But we need to focus on a full market cycle. We need to be calm in trying to offset the potential weakness in these areas and a good way is focusing more on some of the dividend growth.”
That’s what has encouraged him to urge advisors and portfolio managers to revisit “the proper strategy” over a full-market cycle, especially given that we’re getting into a late stage of the market cycle, cycles are moving quicker, inflation persists, and the war has accelerated that as well as concerns about a recession. So, everything could yet come to a head, especially if the war continues.
“It’s not just about the next month or two, especially considering things are changing so quickly,” said Duench. “The proper full cycle approach to dividend paying equities is to be balancing those higher dividend yielders with the strong dividend growers, and I think, right now, we have potentially forgotten about that a bit because everyone’s looking for dividend yield. Everyone’s looking for value and not really focused on dividend growth potential.”
Duench said the benefit of pairing dividend growth with high-dividend yield, without being aggressive on either, is achieving the best balance sheet. That’s preferable to continuing to aggressively focus on high-yield, even given its recent performance. It also means that if there is a recession, then high-dividend growers can help a portfolio weather an economic slowdown.
“Dividend-yielding equities should be a key part of your portfolio, but you just have to temper your expectations and ensure that you’re balancing that risk with the opportunity of growth-yielders,” he said.
Duench noted that, during the pandemic, there was a real emphasis on dividend-yield equities, “and that was the time to get aggressive” since it was one, if not the, best time to buy dividend yields.
“It’s still attractive to have them now. It’s just not that generational buying,” he said. “But the dividend investor needs to balance out that dividend yield with dividend growth areas in the market.”
The dividend growth opportunities are not just in one sector, but they are more stock-specific. So, Duench urged advisors and portfolio managers to look across the different sectors that they might not have originally thought of, including industrials, to seek the best growth-yielding dividends. He said that’s true on both sides of the Canadian-U.S. border, but especially in Canada.
While he noted that most people think of banks, energy, and consumer staples when they think of dividend yield, he encouraged advisors and portfolio managers to look at fields, such as semi-conductors or software, as “they might be lower yields, but their dividend growth is exceptional, too.”
“I think it’s positive that you’re able to go cross-sectional with your dividend growth,” said Duench.
“What we want to do is remind investors to focus on a smoother ride over the full market cycle. There are a lot of growth opportunities out there that are probably more on sale currently than their high-dividend yield counterparts.”
