As investors anticipate a strong economic recovery later this year, many are worried about inflation. What does that mean for dividend stocks?
For CIBC’s Column McKinley, it’s a matter of staying the course. Most of the inflation-fuelled negative market reaction this year has hit stocks trading at high multiples, such as large tech companies and others whose prices soared early in the pandemic.
“For dividend-paying stocks, I think that the same principles that investors have been successful with in the past will always remain true,” said McKinley, senior portfolio manager with CIBC Asset Management.
That means choosing high-quality companies with strong balance sheets that are leaders in their sectors and able to maintain or raise their dividends.
At the moment, he likes the big Canadian banks.
While banks’ dividends are in the 4% to 5% range, they haven’t grown during the pandemic. The Office of the Superintendent of Financial Institutions (OSFI) imposed various requirements on federally regulated financial institutions in March 2020 in the face of uncertainty from the Covid-19 outbreak. While the regulator has unwound measures related to covered bonds, it has indicated that dividend hikes won’t be permitted until pandemic lockdowns are lifted and there’s a clear path to recovery.
The result, McKinley said, is that banks have accumulated record amounts of capital. He thinks OSFI will lift dividend restrictions in the second half of this year and that capital will flow to shareholders.
Earnings season for the Big Six banks kicked off on Wednesday, with the Bank of Montreal beating analyst forecasts as provisions for loan losses continued to decline. All the big banks reported better-than-expected profits in the previous quarter, buoyed by wealth management and mortgage businesses that have thrived since central banks slashed interest rates.
But banks are also “incredibly well positioned for the opening of the economy,” said McKinley, who manages the CIBC Monthly Income Fund.
As interest rates rise, banks will see growth in their net interest margins. He also expects wealth management and brokerage businesses to continue to thrive with high equity prices, and mergers and acquisitions activity is picking up.
McKinley compared the tailwinds for the banking sector to the period following the financial crisis, from 2012 to 2017, when banks delivered above-average returns.
“We think we’re in a very similar environment,” he said. “In banks today, we think you get great capital appreciation potential, but we also think you’re going to be paid substantially higher dividends over time. And banks have been a great steward of capital for investors over the long term.”
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