Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life.

For today’s Soundbites, we’re talking about Canadian dividend equities with Tim Johal, vice-president and portfolio manager at Mackenzie Investments. We talked about potential pitfalls of dividend investing, where he sees opportunities, and we started by asking about how Canadian dividend equities are performing in the current high-interest-rate environment.

Tim Johal (TJ): If you look at the Canadian dividend composite, the index was flat last year. That compares to the TSX that was down high single digits, and the S&P 500 that was down high teens. So, dividend stocks have outperformed in the rising-rate environment. There’s probably a couple of reasons for that. One, dividends tend to be more value-oriented stocks. Value came back in favour over growth last year. We see that trend continuing in this higher-rate environment. You know, dividend equities really are the ultimate short-duration asset. We’re getting our dividends on a quarterly basis, sometimes monthly. And we’re able to take that cash and reinvest it as we see fit. In a higher-rate environment, that is attractive to investors.

Other recent changes in investing strategies.

TJ: Yeah, the other thing that happened last year is the market really became more disciplined. You know, there was a lot of speculation in the market. The cost of money was free. And as interest rates rose, the cost of capital rises. And so, the investors are more disciplined in how they invest their capital. And it’s back to fundamentals, away from speculation, away from bright shiny objects like cryptocurrency and NFTs, and back to value stocks that look attractively priced.

Where he sees opportunities.

TJ: Our portfolio funding positioning is most heavily weighted in financials, energy and communication services. We see a very favourable risk-reward profile in Telus. We expect the company to continue taking market share in both wireless and Internet, particularly as its main competitor — Shaw, in the west — will be undergoing lengthy integration after being acquired by Rogers. Telus also has other drivers, including Telus International, Telus Health and Telus Ag, which we don’t think are fully reflected in the value of the stock right here. The stock yields a healthy 4.9% dividend yield right now. And we see probably 5% to 7% dividend growth over the next three years. So, we like the risk-reward profile of Telus. Differently, we also like Intact Financial, a property-casualty insurer in Canada, with leading market share, and it has a growth platform in specialty insurance in the United States. The company really has strong pricing power across its businesses, which allows it to offset some of the inflationary pressures we see in this environment. The dividend yield is lower, at 2.1%, but this is really a quality compounder. They’ve really been able to reinvest excess capital into profitable growth over time. They have increased their dividend every single year since being spun out of ING in 2005. We see the trend in dividend growth continuing, and we think that’ll be a real value driver for the stock. So, we like insurance. We like the banks here. We think too much has been made of the mini-crisis that’s happening in the U.S. Our banks are world class in Canada. They are better risk managers, they’re more profitable, they’re more predictable and less volatile. So, we like the profile of the banks. We’re constructive on energy over the medium term. We think the world is short energy, and the supply side has been constrained as the industry has really been starved of capital over the last six to seven years. Our biggest weight in energy are pipeline companies. We really like TransCanada. We think the stock is depressed here. It’s had a long history of dividend growth. It has major growth projects coming on, which it is financing in the near term here. So, the cash flows are going to growth projects, and it is taking on some debt. They’ll be able to sell some assets to shore up the balance sheet, and we think there’s value there.

And finally, what’s the bottom line on dividend investing in the current environment?

TJ: We are still very constructive on dividend investing. Over time, in the Canadian market — we have data going back to 1956 — since 1956, dividends have represented 55% of the total return in the Canadian market, the other 45% obviously coming from capital appreciation. We see dividends as a component of total return, coming back to at least historical averages of half of total return going forward.

Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to Tim Johal of Mackenzie Investments.

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