Stick to dividends, look to the U.S.: McIntyre

By Staff | October 6, 2011 | Last updated on October 6, 2011
3 min read

As financial professionals, you already know that recent market volatility has provided ample opportunity to deploy capital—if only your clients have the nerve to swim against the current.

From late July through the first trading sessions of October, most major indices have fallen by more than 10%; some, more than 15%. It’s time to go bargain hunting.

“September proved true to form and was an ugly month, as Septembers frequently are,” said Sandy McIntyre, president and chief investment officer of Sentry Investments. “Major market bottoms are frequently formed in October, so there is at least that small semblance of light at the end of the tunnel.”

McIntyre spoke to an audience of advisors in Toronto on Tuesday, as part of the Sentry Investments Road Show.

Much of the recent market ugliness stemmed from fears that the European banking system was on the verge of collapse, under the weight of unsustainable sovereign debt loads.

While Canadian investors may see our market as a safe haven that should benefits, McIntyre explained that these European institutions were cashing out of foreign holdings to shore up their capital positions. The decline of the TSX was due to European liquidity needs, rather than a negative call on Canadian stocks.

There remains cause for concern in global market, but McIntyre suggested the fear is overblown. Corporate earnings among S&P 500 members are back to their 2007 highs, around $90.

“If the world is coming to an end, there should be parking at Yorkdale,” he said, referring to an upscale, north-Toronto shopping centre.

He said too many investors look to economic forecasts to predict market movements, but they would be better served looking to the yield curve on U.S. Federal Treasuries.

“Operation Twist is flattening the yield curve with very difficult results across the markets,” he said. “I would love to see a more positively sloped yield curve that rewards long-term investors, particularly those in credit markets.”

In fact, large U.S. companies in general offer the best price opportunities, relative to 10-year Treasuries, since 1958, he said.

“We’re going to get another cyclical opportunity to buy high-quality companies, if anyone cares,” he said. “Personally, I would rather own Microsoft with a 9x multiple, an 11% earnings yield, 2.8% dividend yield, than the paper of the U.S. government any day.”

While dividends came into favour during the recent downturn, they will play an increasingly important role in portfolios over the coming decades.

“The Bank of Canada has very clearly told you that the target inflation rate is 2%,” he said. “They’ve told you that you’re facing a 20% reduction in purchasing power over a 10-year period.”

Traditional retirement portfolios with minimal equity exposure will not work in the future, he said, as retirees will outlive their savings. Their portfolio needs will include both an income stream and capital growth.

Dividend paying stocks can deliver on both of these needs, and provide other benefits as well. They are a powerful risk modifier, McIntyre said, and allow the investor a painless way to withdraw capital from the portfolio.

“The only way that alpha is superior performance is if you have the discipline that harvests the return as you go along,” he said. “Otherwise, superior performance could be performance to the upside, and commiserate decline as high beta whip-saws you up and down.”

A dividend provides insulation against credit market illiquidity, as dividend payers have the option of cutting their payout. Distasteful though this may be, it beats running out of capital.

Dividend-payers are themselves more liquid when stock markets are jittery, allowing the investor to cash out if needed. They typically remain well-bid in tough times, while speculative stocks are deeply discounted. staff


The staff of have been covering news for financial advisors since 1998.