How one fund is delivering income and total return through market volatility

This article was produced in partnership with Manulife Investment Management.

As Canada and United States prepare for more volatility – be it because of central bank policy or geopolitical tensions – Manulife Investment Management has two funds that seek income while also offering a level of defence in a volatile market.

The Manulife Smart U.S. Dividend ETF (UDIV) and the Manulife Smart Dividend ETF (CDIV) look for consistent dividend-paying stocks in the MSCI U.S. Index and the Canadian TSX Composite universes. Companies are also assessed using other quality-oriented metrics like interest coverage and payout ratios.

Geoff Kelley, global head of strategic asset allocation within the firm's multi-asset solutions team, added that the metric process is a waterfall, which looks for metrics like good margins, and changes in margins over time, return on investments, return on equities, and debt to equity. UDIV, for example, has about 145 names from the 650 in its universe.

Kelley explained: “We are looking for dividend yielding stocks, with dividend yields above the 10-year [treasury] rates in the U.S. and Canada. In order to have a broad enough set of names for the optimization part of the framework to play with, we look at dividend yields of companies that have consistency over time and we’ll look at a combination of dividend yield, payout ratios and things like dividend growth.”

This process picks up a wide range of companies and sectors, including some REITs, utilities, financials, and tech names. Kelley said the funds may suit investors who are at the tail end of their career with retirement looming. However, he also believes that, as populations age, the search for yield will ultimately result in more widespread interest.

“If you're looking at fixed-income markets, yields have come down steadily over the past 30 years,” he said. “The spreads on more speculative grade fixed income assets are tighter than they’ve ever been, and so participants are looking elsewhere for yield, and I think there's going to be a thirst for yield wherever investors can find it. That'll boost returns over the long run, and dividend paying stocks tend to do marginally better over time than non-dividend paying stocks.”

While the pandemic did not alter the process behind either actively managed fund – “no need to zig and zag with the markets”, added Kelley – the products held up despite the volatility. UDIV and CDIV both beat their indices and had lower drawdowns than their benchmarks when the market reached its bottom in January.

“The funds hit on all four cylinders,” he added. “And that's kind of what we expected. Dividend yield, and certainly the quality metrics that we use, paid off in January.”

Rebalancing is done quarterly and takes into consideration things like corporate actions. For example, it might be prudent to hold off on a particular name if it’s being taken over or there may be uncertainties around a company’s ability to pay dividends.

And while more systematic investors see dividend yield as a factor, Kelley likes to view it through a quality lens. He said: “dividend paying companies tend to be higher quality over time. And so that's another desire to screen that universe.”

He added that, broadly speaking, “We are still in favour of U.S. and Canadian stocks in general. On a valuation perspective, however, the U.S. is looking a little rich relative to its northern neighbour, and versus other areas like Europe. We expect that to turn at some point but doesn’t see that happening anytime soon."

Kelley said: “We’re still bullish on the U.S., bullish on Canada, and bullish on equities in general. I feel like we're still early in the cycle and there's still some room to grow.

Certainly, we're seeing a lot of volatility in the market. We continue to see volatility during COVID, the Russia-Ukraine crisis, political tensions in the US and elsewhere. Given how CDIV and UDIV performed in January, if you can stomach that kind of volatility, they may continue to demonstrate resilience for investors, for at least the medium term.”

_{Sponsored by Manulife Investment Management, as of February 2022.}

_{The views expressed are those of Manulife Investment Management and are subject to change as market and other conditions warrant. Information about a portfolio's holdings, asset allocation, or country diversification is historical and is no indication of future portfolio composition, which will vary. Certain research and information about specific holdings in the Fund, including any opinion, is based on various sources believed to be reliable. All overviews and commentary are for information purposes only and are not intended to provide specific financial, investment, tax, legal, accounting, or other advice and should not be relied upon in that regard. This material was prepared solely for informational purposes, does not constitute an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security and is no indication of trading intent in any fund or account managed by Manulife Investment Management.}

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