Positive dividend growth will continue over the long term, and benefit your clients.
Advisors and portfolio managers should strive to find companies whose stocks are temporarily mispriced relative to their long-term intrinsic value, says Domenic Monteferrante, first vice president of Canadian Equities, CIBC. They should also help clients construct portfolios that have characteristics consistent with a dividend fund mandate.
“By doing so, [advisors and portfolio managers] can achieve above average risk-adjusted returns over the long term,” says Monteferrante. “Look for companies with sustainable business models, as well as dividend yields above the market average.”
Investing is challenging in the current global market, but investors shouldn’t be complacent. They should follow significant changes in the macro environment and in the specific outlooks of various companies, since investment opportunities can arise when markets are extremely volatile.
In particular, structural debt issues continue to plague the U.S. consumer, as well as a number of developed economies worldwide. Global growth will be positive but modest for the next few years, and Monteferrante forecasts equity markets will go through waves of optimism and pessimism.
“Investors should remain cautious, but not bearish, on Canadian equities,” he says. “In the near term, market volatility—caused by renewed anxiety over the U.S. and Eurozone—will create opportunities for investors to make value-added decisions for their portfolios.”
Due to low interest rates, common equities offer more attractive risk-adjusted returns than bonds over the long term.
Dividend yields will also be positive going forward; the balance sheets of many companies have improved over the last few years and they’ve refocused on having lower debt. Businesses have also participated in share buybacks and are striving to return capital to their shareholders.
Monteferrante offers a word of caution: While the cycle for dividend growth isn’t over, your clients need to be aware of valuation fluctuations and be more active in managing their portfolios.
He warns, “There are certainly situations where stock prices move ahead of the fundamentals, for example, and that particular stock will then suffer from flat performance going forward.”
Watch for the June edition of Advisor’s Edge, where we’ll discuss how to convince clients to stick with equities.