Stock market volatility is here to stay, and financial advisors should focus on dividend-paying stocks and corporate bonds for more reliable returns for clients, experts said on Tuesday.
At a panel discussion held at the Toronto Stock Exchange, Srikanth Iyer, senior portfolio manager and head of global investments at Guardian Capital LP, urged advisors to change their approach to equity investing by focusing on dividend-paying stocks.
“You’ve got to redefine equity investing,” he said. “Extend your book of business through income and yield.”
He recommends buying stocks that are raising their dividends. Already, Iyer said 60% of total returns in global markets are coming from dividends. And with many corporations flush with cash, dividend yields are poised to rise.
Indeed, Roger Rouleau, vice-president of fixed income at Natcan Investment Management Inc., said the cash on corporate balance sheets has grown to $300 billion from $100 billion in the recession in the early 2000s.
“Corporate balance sheets are much healthier right now,” he said.
Rouleau urges advisors to get clients invested in corporate bonds in the current environment. He said yields are attractive right now, partly because markets are overpricing the possibility of a recession.
“In our view, you’re being overcompensated for credit risk,” he said. This is especially true given the extent to which corporations have reduced debt and improved the state of their balance sheets since the financial crisis began in 2007, Rouleau said.
The biggest risk currently facing fixed income investors is interest rate risk, he said, but he added that investors are being well compensated to take on this risk.
An investment approach centered around corporate bonds and dividend-paying stocks is likely to resonate with clients, the panelists said, since investors are increasingly focused on earning income from their investments. As huge numbers of baby boomers begin to retire, income will become a top priority.
“There never has been a [greater] need to focus more on longer term income solutions given the demographic and fundamental trends that we’re seeing,” said Emanuella Enenajor, economist at CIBC World Markets.
Over the past two decades, she said CIBC has witnessed a noticeable shift in Canadians’ assets away from cash towards higher yielding investments.
Advisors should also take steps to help clients protect their portfolios from volatility, which is likely here to stay, according to Iyer. He acknowledged that it’s become harder to protect against volatility amid the convergence of global markets in recent years. Even a geographically diverse portfolio tends to fluctuate just as much as a concentrated one, he said.
“Today, it doesn’t matter whether you’re choosing France or Germany,” he said. “It doesn’t matter where you’re making the widget; it depends on what the global macro conditions are.”
He said the best way to reduce volatility is to seek alpha through an actively managed funds.
“If you want to reduce volatility, you’ve got to go off benchmark,” Iyer said. “Beta is riskier than alpha – alpha is money managers taking risk away from the market.”
IE