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Dividend shares | Relieving Stock Block Ailment



It is difficult for investors to find a source of comfort in these very turbulent times in the financial markets. The fear of an upcoming recession adds to inflation to erode the short-term performance of the main financial assets.

For opportunistic investors, this painful episode in the stock markets can also be an opportunity to “shop around” for quality stocks at a discount. Particularly on the side of dividend stocks, where the current yield in quarterly income can partially offset the expectation of a recovery in stock market value.

Why dividend stocks?

“Having dividend-paying stocks or shares of dividend-paying equity funds in your portfolio is a way to mitigate the negative effects of high inflation. Dividend equity investment strategies usually do well in bearish and recessionary markets given the generally lower business and financial risk of these companies,” said Hugo Ste-Marie, Chief Strategy Officer. portfolio management and quantitative analysis at Scotiabank World Markets, in a recent comprehensive analysis of the dividend-paying equity market.

With declining stock market values, dividend-paying stocks of quality companies are becoming even more attractive investments for investors seeking regular and reliable investment income.

Marc Novakoff, managing director and equity portfolio manager at the Montreal firm Jarislowsky Fraser

“In an inflationary environment, too, the dividend-paying stocks of quality companies that are well-selected by investors have a better potential for protection against inflation than fixed-income bond securities,” adds Mr. Novakoff, in an interview with The Press.

Why, when bond rates have become competitive again?

“It is that in addition to the quarterly dividend, the share price can benefit from future gains in value of the company concerned, both in terms of its balance sheet (assets/liabilities) and the progression of its income and profits, explains Mark Novakoff.

“This is not the case with bond securities which are acquired and kept in the portfolio until their maturity. Investors know in advance the amount and frequency of their fixed interest income, as well as the amount of invested capital that will be repaid to them at maturity. »

Similar opinion from Émilie Croteau, who is an associate wealth management advisor at Groupe Bernier, an associate of National Bank Financial in downtown Montreal.

“In a context of stubborn inflation, it is important for investors to maintain a minimum current yield in income in order to mitigate the impact of inflation on the value of their investments,” says Croteau during an interview with The Press.

“As for the choice of income securities, we have a preference for high-dividend shares of quality Canadian or American companies over bonds, even if bond interest rates have become competitive again around 4% to 5% . »

For what main reasons?

“First, high-quality dividend-paying stocks provide better protection against inflation with the combined effect of their current dividend yield as well as the rise in the value of companies’ real assets,” explains Croteau.

The market value of dividend-paying stocks of quality companies is usually less vulnerable to fluctuations in interest rates, compared to other types of income securities.

Émilie Croteau, Associate Wealth Management Advisor at Groupe Bernier

“Finally, dividend income from Canadian equities [lorsque détenues en compte non enregistré] benefit from a tax advantage compared to interest income from bonds, which are fully taxable. »

In the opinion of Eddy Chandonnet, equity portfolio manager at the Quebec firm GPS Medici, investors interested in dividend stocks should consider that “dividend income is only a secondary component of the total return of ‘a long-term investment’.

“When considering investing in equities because of their higher dividend yield, consideration should also be given to their potential for upside value from the company’s growth and development plans,” says Mr. Chandonnet during a discussion with The Press.

“Otherwise, we risk being seduced by stocks of companies with low growth potential and whose high dividend could prove to be the only long-term return for investors. »

How to do it ?

“Investors need to be discerning in their approach to dividend-paying stocks. Dividend equity investment strategies and products abound on the market, but their performance differs greatly,” says Hugo Ste-Marie of Scotiabank World Markets.


Hugo Ste-Marie, Director of Portfolio Strategy and Quantitative Analysis at Scotiabank Global Markets

My analysis of the US and Canadian stock markets suggests that companies with a history of boosting their dividends may be best positioned to weather the storm. These companies often operate in lower risk and less cyclical industries.

Hugo Ste-Marie, Director of Portfolio Strategy and Quantitative Analysis at Scotiabank Global Markets

“Their stocks thus offer an advantage in a recession risk environment and, as a result, an increased risk that the bright forecasts for earnings and dividend growth will not be realized in the more cyclical sectors of the stock market”, warns Mr. Ste-Marie.

At Jarislowsky Fraser, the general manager Marc Novakoff specifies that the selection of company shares is carried out according to the same analysis criteria, whether for shares with dividend or without dividend.

“It’s very important to look beyond the current rate of dividend yield on a company’s shares, if only to properly assess the quality and reliability of this dividend according to the evolution of the company’s business. company,” insists Mr. Novakoff.

Among other things, “we must examine the level of coverage of the dividend paid as a percentage of the profits and cash flows that are generated by the company”, explains Marc Novakoff.

Then, it is necessary to inquire about the policy of determination and payment of the dividend of the company in question.

“Some companies operate with a minimum level of dividend which they can then increase according to the progression of their financial results, summarizes Mr. Novakoff.

“Other companies operate with a dividend, the amount of which may fluctuate up or down depending on the evolution of their financial results and the business situation in their sector of activity. »

Beware of “yield traps”

For Hugo Ste-Marie, of Scotiabank World Markets, “the simple fact of buying stocks whose dividend yield is higher than the average of the stock market is not an optimal investment strategy”.

“These high-dividend stocks can become ‘yield traps’ in the event of an economic downturn that could force these companies to reduce the amount of their dividend,” Ste-Marie warns.

“In the Canadian stock market, an investment strategy focused on higher dividends would be too dependent on the shares of the big banks. It could unbalance a stock portfolio too much. »

Therefore, continues Hugo Ste-Marie, “it is better to focus an investment strategy on stocks with regular dividend increases in specific sectors of activity, rather than betting mainly on the current level of their dividend yield” .

“Based on my analysis, Canadian companies with a sustained history of increasing their dividends are the only ones to deliver strong, consistent returns above the average of the S&P/TSX stock market index over the past 20 years. . The stocks of these companies also tend to provide better resilience during bear market episodes. »

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