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The past two years have been a time of introspection. With less time spent commuting or consuming, many investors have taken time to re-examine their priorities, as well as their portfolios.

Many are coming to the realization that the portfolio that worked going into the pandemic may not work coming out of it. The past decade was dominated by high-growth investing, often at any cost. But as the world emerges from the worst of the pandemic, preferences have shifted.

As the markets adapt to a new reality, now is the time for portfolio reconstruction.

A different world

The fiscal and monetary stimulus enacted during the pandemic has left the world awash in cash. This includes a massive increase in consumer savings, as spending patterns changed during lockdowns. That pent-up demand has now been unleashed, driving inflation to highs not seen in 30 years.

“This is typically an environment where many dividend-paying stocks perform well,” says Darren McKiernan, Head of the Mackenzie Global Equity and Income Team and the lead manager of the Mackenzie Global Dividend Fund. Katherine Owen and Ome Saidi are also named portfolio managers on the fund.

As managers of a core portfolio, his team is style agnostic in terms of the growth-value spectrum. The overarching goal is to find high-quality businesses with the free cash flow to support a healthy dividend.

McKiernan points out that over the past decade of growth dominance, dividends have accounted for just 15% of realized investor returns, far short of the 40% average that was established over the preceding 120 years.

The dividend solution

A pivot toward durable businesses that pay sustainable dividends may provide a degree of stability to a portfolio overloaded with growth.

“We believe dividends will be an important source of total returns going forward,” says McKiernan. “All we need is for the world to look more like the last 120 years than the last 10 — and signs seem to indicate that’s going to be the case. At the very least, the long-term averages are on our side.”

If the global economy continues to run hot, inflation and the rising interest rates designed to tame it should benefit portfolios that are weighted toward pro-cyclical sectors, such as financials, travel and leisure, as well as energy and materials.

However, active management remains key, as skillful stock selection has the potential to add considerable value.

“Not all dividend-paying companies are created equal when it comes to a rising-rate environment,” says McKiernan. “There’s a big swath of the investment universe that might be disproportionately negatively affected by rising interest rates.”

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Last updated on August 2, 2022