Martin Lefebvre
Hi everyone. Thank you for tuning into our NBI webcast series. I'm Martin Lefebvre, Chief Investment officer and strategist at National Bank. Today, we're going talk about Canadian dividend stocks and to do so I'm joined with none other than my old friend John Goldsmith, head of Canadian equities at Montrusco Bolton investment and he's currently the lead manager for all Canadian equity Strategies. John, welcome and thank you for being with us.
John Goldsmith
Thank you so much for having me.
Martin Lefebvre
No problem, John. With the difficult environment that we're in, the search for yield and stability is very much in vogue and I can't wait to hear your thoughts on the topic, but before we do so, could you tell us a little bit about your background, your career and how you became a portfolio manager?
John Goldsmith
Absolutely so I'm currently ahead of Canadian equities at Montrusco Bolton Investments, Montreal based asset manager. I oversee a team of six investment professionals and about 2.8 Billion of Canadian Equities under management. I've been at Montrusco now for over 18 years. I joined as a senior analyst back in 2004, covering primarily materials in healthcare, which some would say is a pretty odd combination of sectors, but they both share a finite life cycle, whether it's mine or a patented molecule. And in 2009, I was promoted to portfolio manager in 2010, I picked up responsibility for the equity Income fund, which is the product and the strategy that we manage for National Bank.
In 2017, I took over full responsibility for Team Canada. Prior to that, I was working as an investment analyst at CN Pension fund, the pension arm for Canadian National Railway for four years covering materials, healthcare and telecom, and I first got in the business back in 1997 during the Asian tiger crisis. So seems like I always seem to pick the pivot points in terms of crises.
Martin Lefebvre
Yeah. You mentioned you've been in the business for some time now and you must have weathered, you know, lots of market downturns such as the one that we're in right now. Would you say that staying invested during these difficult periods is key?
John Goldsmith
Totally agree Martin, that being said, each downturn is slightly different and to quote the famous U.S. writer and humorist Mark Twain:
History does not repeat itself, but it often does rhyme, and there's definitely a lot of similarities. Downturns do share commonalities, and they typically are borne out of periods of excess above trend growth, which we saw obviously as a result of the COVID stimulus bursting of bubbles. You've seen what's been going on with crypto in the last couple of days and high levels of emotion and fear. And today the period that most resembles what we're going through is probably the 70s and early 80s, that's high inflation.
Stagnating economic growth due to higher interest rates and resource nationalism. So how does one not succumb to fear? I'm getting back to your original question by having a well-defined process and sticking with the game plan timing the market at the end of the day is a complete mugs game. Missing the big recovery days that accrue to those that remain well invested is paramount to being able to generate a long term compounded returns.
Martin Lefebvre
OK, so how do you navigate these troubled times that we're in? I mean, if you, if you're a balanced investor, sometimes you know having a well diversified portfolio does the trick, but you manage specific mandates such as equities. So could you explain a little bit more regarding your investment philosophy? Do you have a factor approach and if so, what kind of style do you favor and tell us why?
John Goldsmith
No worries. So we focus on companies with sustainable competitive advantages and an ability to generate higher returns on equity, which is the quality component and higher growth per share, which is the growth component versus our peers. So we're quality growth manager, we call this quality growth investing and this allows us to focus on proven highly visible business models. So also means lower beta and lower volatility, which during these markets is exactly what you're looking for. Now for the dividend mandate, in particular the quality component translate to the sustainability of the dividend.
Which basically can be broken down to the dividend payout ratio, which mathematically is just the dividend per share divided by the earnings per share a number below 75 implies that there's enough buffer room to pay a dividend.
Should earnings and cash flow be under pressure, and I'll talk to you about how our product is set up in terms of both the dividend yield and the payout ratio and the betas. But Needless to say, we're significantly let's 75% now as it pertains to growth though, we put a lot of emphasis on the dividend per share growth because that's really at the end of the day would provides inflation protection. So why is that important? Well, I use the example - think of long duration assets such as the 10-year bond.
Buy the bond and it pays out a coupon, also known as a nominal yield. But that coupon doesn't grow from the time you get it for the next 10 years is going to pay you the exact same dollar amount based on your initial investment every year. However, you and I and our investors, we live in the real world and the real world has inflation and we don't have to get into the details of the amount of inflation we've seen over the last 6 to 12 months. But it's extremely high. Inflation erodes the purchasing power of money and erodes the nominal yield of income streams.
So once again, getting back to our strategy, quality growth, we want to have a lower payout ratio on the dividend and then we want to have the growing dividend per share. If we can buy companies that can grow their dividend per share each and every year by amount substantially over inflation, that's what's going to protect your income stream. So for the NBI Equity Income Private Portfolio and the NBI Canadian Dividend Income ETF strategies, these are forward dividend yields currently 3.7% versus the TSX at 3.2% and dividend growth rate for the next year is 9% versus the most recent Consumer Price Index (CPI) prints in Canada of 6.9% and the TSX benchmark is 7.9%. So the dividend growth is higher in both cases and our dividend payout ratio, which talks about the quality of 62%, which is highly sustainable.
Martin Lefebvre
So basically what you're saying is that with a dividend strategy, even though yields on the bond market have increased significantly over there the past couple of months, it remains in essence a very good strategy in the environment that that we're in. So as we mentioned earlier there, there's lots of volatility. What kind of opportunities would you say line today's equity markets?
John Goldsmith
So everyone's trying to call the Fed and the Bank of Canada interest rate pivot point. We saw last week on Thursday the inflation numbers came in slightly weaker than expected and it led to a melt up in the equity market. So very strong equity market performance. But before getting into where the opportunities are and where we want to go, I think it's really probably more useful at this point in time to figure out where are we currently in the cycle. What do you want to avoid and where we actually want to go depending on our starting point.
So we can always determine where we are in the cycle by looking at the year over year changes in the CPI, which is inflation and the year over year changes in real GDP growth. So many people have been saying for the last 6 to 12 months that we're in a stagflation regime, which is not untrue, but stagflation typically means that you're looking at increasing inflation and decreasing GDP growth. Well, it appears that the headline CPI inflation peaked in Canada around June around 8.1% and the numbers have come in slightly below that. So inflation's not recently increasing anymore it's still high, but at lower rates. Real GDP, however, is decreasing. The last print came in at 4%. So we're actually in a regime where inflation is declining, as is growth, which is more of a disinflationary type of regime. And getting to your question as to what asset classes and opportunities look good, well asset classes that work well in that type of a regime are U.S. dollar. So that's a very crowded trade, if not the most crowded trade right now.
Fixed income and you've seen bond yields fall over the last two weeks. That means bonds have increased in price and you've made money on the bonds and fixed income like securities such as dividend stocks. So fixed income like securities are typically long duration type assets. Dividend stocks usually fit that build. Things that you want to avoid are commodities, levered equities, when rates go up and global growth is trending to 0, which is kind of the situation in the world right now. So the factors that work well in this regime are low beta.
Low Vol dividend yield, quality defense. And guess what? Those all happen to be key factors and attributes of our investment style.
Martin Lefebvre
Yeah. So are you able even to have a dividend strategy to play key defensive sectors within that strategy? Is that something that you would possibly consider?
John Goldsmith
Absolutely. So, for us, the key defensive sectors or the playbook for defense are staples primarily the grocers, utilities, pipelines and telecom. In the past, one would have also said that multi residential real estate would have also been a defensive space.
There are two reasons why Multiresidential real estate isn't that case today, and the reason why we're not overweight that sub-industry. One, the level of leverage that these companies have and, two, given COVID the governmental regulations have prevented them to be able to pass off rent increases at a rate that's superior that inflation. And as a result, you actually have a negative arbitrage going on there. But the first four - Staples, Utes, pipelines and telecom are absolutely key cornerstones of the portfolio that we have today.
Martin Lefebvre
Right. Can you tell us a little bit more about some of the stocks that are yielding the most?
John Goldsmith
Sure. So, a couple of things. First of all, those four sectors or sub-industries that I've mentioned also have sold off since their peak probably anywhere around from May to the June time frame. So, if we go into each one of those, Metro and Loblaws now, they're not monstrous dividend yielding machines. They are yielding about 1.5% (as of the date of this podcast), which is half that of the TSX. But they've been growing their dividends by 11% and 8% respectively over the last three years.
And when you switch to Fortis and Hydro One on the utility side, both yielding between 4% and 3.2% also growing their dividends at a pace of over 5% over the last three years compounded.
Enbridge and TC Energy are the by far the two highest yielders in the portfolio. They're very big North American pipeline companies moving both crude and natural gas and bridge yielding 6.4% TC Energy, formally TransCanada Pipeline, 5.7% and also growing their dividends per share by a tune of over 5% per annum. And lastly, the telecoms, and obviously they've had some negative headwinds. We know what's gone on the space with regards to the Rogers and Shaw transaction that's put a little bit of cold water on things.
You're getting a lot of bang for your buck and you're getting a lot of return coming from dividends from these names.
Martin Lefebvre
Yeah, I see all of these names are yielding more than what you get on the reference bond index here in the country, and owing to what you just mentioned, I guess that this these dividends seems to be a sustainable in the in the longer run and we've certainly seen sort of a rebound as of since the start of the of this quarter. Do you think that this rally that we were in has got more legs?
John Goldsmith
So, you know, we saw the rally in full effect last Thursday with the later CPI print and then over the course of two days, we saw the TSX, S&P 500 and the NASDAQ benchmarks up four, six and a half and a whopping 9.4% respectively. So, in a nutshell, the losers of 2022 up until November 10th where the winners for two days, the commitment of trader’s reports still point to negative positioning and glimmers of hope can lead to short squeeze that inevitably lead to big rallies like we had late last week.
That said, we do feel the market is more likely to be range bound and are very wary of bear market rallies. And if you believe in the commitment of the Federal Reserve to combat inflation, that means they cannot afford to make the same policy errors as in the 70s and ease too soon. That likely means to echo Jerome Powell's comments from a couple of weeks ago, they see higher rates for longer, which does not mean that we're going to be seeing a pivot. And that is exactly what the market is being prepositioned for.
Martin Lefebvre
OK. So John, we're going to end this on this, and I got to ask you, do you foresee a recession in 2023?
John Goldsmith
We do, we believe that we should be aware of the bear market. We believe that there is a quantitative tightening that's going on right now that will lead to a quantitative recession and in an effort not to make the same mistakes that Ed Burns made, the former Fed Reserve chairman prior to Paul Volcker.
The likelihood is that the rates will be higher for longer. That will cause a slowdown, but that slowdown is what will sow the seeds of eventually breaking the back of inflation and then getting us back to a more normal market.
Martin Lefebvre
Well. Thank you once again John, for sharing your thoughts and thanks everyone for tuning in. That's it for today, but we'll talk again soon over the coming months. Thanks again.
Martin Lefebvre
