Dividend or growth or both?

By Vikram Barhat | October 22, 2010 | Last updated on October 22, 2010
3 min read

The two-year-long vertiginous roller-coaster ride may have driven investors to safer and more stable investment destinations. Or so would suggest the steady stream of recent media articles that seem to place more-than-moderate focus on dividend stocks.

Growth oriented managers grudgingly accept there’s been a shift, but summarily dismiss any suggestion that dividend investing has become the norm. Nor is it, they say, a growth-versus-dividend phenomenon.

“Equity funds have struggled overall in terms of flows,” says Norman Raschkowan, executive vice-president, investments, chief North American strategist and team lead of Mackenzie’s Maxxum Funds. “The fear of double dip recession and the Bank of Canada (BoC) recently cutting its forecast for Canada make people more cautious and conservative in their allocations.”

Dividend funds, he says, have benefited more from a general desire for income in a low-yield environment. “I don’t think it’s so much a growth stocks versus dividend stocks [debate].”

The need for comfort in these volatile times is what it’s about, says Serge G. Pepin, head of investments, BMO Investments Inc. “Over the last year, there’s been more comfort with dividend-paying stocks rather than the growth stocks because of market volatility.”

The aging population is also driving investors toward dividend stocks. “Baby boomers are retiring, or are near retirement, and are looking for a stream of income, so yield is becoming increasingly important,” says Pepin. “I think it is most definitely a real shift, not a passing fad.”

There’s no denying that once considered the sleepy slice of a portfolio, dividends have lately been drawing much interest. How much of that is the result of the media attention?

“I don’t think it’s been overplayed by the media; it’s the reality,” says Pepin. Depending on the investors’ financial goal, dividend stocks are an important part of a portfolio, he says. “Having that diversification in dividend stocks or funds along with growth funds is always a good idea because you never know when markets are going to shift.”

Raschkowan, on the other hand, admits media plays a role, but denies it singles out dividend funds. “The media’s focus has also been on the income story and income replacement, as opposed to dividend funds per se.”

Historically, dividend funds have generated attractive returns on a risk adjusted basis compared to the market overall. The fact, says Raschkowan, “is not inconsistent with the academic data that shows over the long term, more value-oriented stocks tend to outperform growth stocks.”

There does appear to be some cyclicality, says Raschkowan. “After a recession the money tends to go first into investment categories that are perceived as lower-risk, like balanced funds and dividend funds, and as growth accelerates the attention tends to shift to more growth oriented sectors.”

Does that mean investors will rush back to growth funds as soon as economy improves?

Pepin says he is interested in the suggestion, but takes the middle path. “I think investors who are currently in dividend funds or stocks will tend to remain, although they may diversify a little bit into growth stocks.”

Raschkowan’s expectations are not dissimilar. “As the economic climate improves, investors will broaden their range of assets (and) dedicate more to growth funds, but I don’t think investors will lose their appreciation for dividend funds.”

The two, however, have differing views on where the cash will come from to fund growth investments. “The main shift perhaps will come from the ‘GIC refugees’ and those in cash who may tend to shift to growth oriented stories,” says Pepin. Raschkowan suspects “what you’re more likely to see is money coming from bond funds into equities.”


Vikram Barhat