They expect somewhere around US$160 billion
Investors are starting to put money back into Toronto's dividend-paying stocks after neglecting them for more than two years, according to the Canadian Imperial Bank of Commerce (CIBC). This trend will likely grow as short-term interest rates in Canada continue to decrease.
“A rotation back into high-yielding equities such as utilities, REITs and communications is just beginning,” Ian de Verteuil, an analyst at the bank, wrote in a research note Sunday. If rates continue dropping, his team expects Canadian investors to move $220 billion (US$161 billion) into dividend-paying stocks as they shift away from fixed income-linked products.
When interest rates were higher, dividend-paying stocks were less appealing to investors, unlike other options such as term deposits, high-interest savings account ETFs and technology stocks. This caused the S&P/TSX Composite High Dividend Index to underperform the broader Canadian and U.S. markets in 2023 and so far in 2024 on both a simple price appreciation and total-return basis.
“Canadian investors have always struggled to find yield,” de Verteuil wrote. “Unlike the US, there are very few options for ‘high’ nominal yield – there is no Canadian municipal bond market and the high-yield bond market north of the border is extremely narrow.”
When Canadian interest rates peaked, $200 billion was diverted into fixed-income alternatives instead of the high-yield stocks that would normally attract those funds.
Still, many of these sectors are confronting idiosyncratic obstacles, de Verteuil noted. “Communications stocks are facing aggressive price competition and regulatory challenges, real estate companies have long-term Covid effects and banks continue to face rising loan losses.”
However, with the Bank of Canada starting to lower interest rates in June, some funds are starting to flow back into high-yield stocks with improving performance. For example, the real estate and utilities sector rose by 11% and 7.8%, respectively, in July. The central bank has now cut interest rates twice with additional cuts expected in September and October.
As rates come down, demand equating to 15% of the market capitalization of the country’s utilities, REITs, telecoms and financial sectors should pick up. “Canadian investors should continue rotating into these sectors in the coming months,” de Verteuil wrote.
