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Editor’s note: This interview was recorded on Oct. 10.

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Text transcript

Colum McKinley, managing director and chief investment officer of global equities, CIBC Asset Management.

The rate environment is an interesting one, and it’s had a profound effect on equity performance over the last year. If we go back to last fall, so in late 2018, the market was expecting and debating about whether or not we’re going to see two or three rate increases. And while we transitioned through 2019, because of the environment, some of the data that was coming out, we’ve actually seen the Fed come in and cut interest rates and there’s expectations for potentially more to occur. And so this is a very dramatic shift, and what we’ve seen is dividend-paying stocks, so stocks like telecom and the REITs, have performed incredibly well. And so when these businesses are strong and stable, they become a very attractive alternative for investors that are looking for a source of yield or a source of dividend income.

And so that has caused… The interest in these stocks have bid them up and they’re doing quite well in the market. When we look at the telecoms, the telecoms are a very stable business, and you think about the underlying relationship that exists between the telecom company and the customer, it’s basically an annuity. And so these are… We all have two-year contracts where we pay $50 to $60 a month, month after month after month, and so that relationship guarantees or contributes to the steady cash flows that companies generate that allows them to pay consistent dividends and to grow those dividends over time. Telus is one of our favourite names in the telecom space. Today, it offers a yield of 4.7%. Over the last five years, that dividend has grown in excess of 8% a year. So not only do you get an attractive yield today, but they have consistently grown that dividend over time.

Now there’s lots that we’re watching. We’re always conscious of the risks in an underlying business. One of the things that we would point to is we’re keeping a close eye on the growth rates for the telecom companies. Obviously the penetration level of the number of people that have cellphones today is a near record highs. In fact, I would have a hard time thinking of or finding people that don’t have cellphones today. So that may affect future growth rates as we’ve fully penetrated the market. We’re also hearing some rhetoric as we go through the Canadian election. The politicians want to lower cell phone bills. That’s a very noble cause for them to pursue and they have been working on increasing competition in the market, but we’ll watch that closely, but at this point we’re not too concerned about that threat.

One of the other areas that has done quite well, as we’ve seen a migration into dividend paying stocks, is REITs. The S&P/TSX REIT sub-index at the end of September, so year to date Sept. 30, was up 19.5% and a total return of 23.8%. Most REITs offer a yield of between 4% and 7% and that yield is backed by hard assets. So it’s backed by office buildings, industrial warehouses, retail buildings. And so we think the REITs will be very defensive if market volatility increases. When we talk about looking at ways to build defence in client portfolios, REITs is one of the ways that we have achieved that. And I think a great example of the types of REITs that we’re really interested in is a company by the name of Cominar.

They have a mixture of industrial, office and retail assets, so they have diversification in their underlying assets. They’ve gone through fairly significant changes at the company. There are four board members that have joined over the last year, so that’s new ideas and new input coming to the board. They have changed the management team quite substantially and bringing in, again, new leaders in the business, and they have focused that management team on reducing costs, strengthening the balance sheet, and improving execution. And so proving execution here is a better occupancy at the properties and more effective development of their existing assets.

I think all of that is going to lead to very positive things for investors. The stock yields over 5% today, and over time I think this new management team is going to execute. We’re already seeing early signs of that happening, and they’re going to deliver dividend growth, share buybacks, and improving profitability to shareholders. And so we think it’s a very interesting opportunity in the market today.

CIBC Monthly Income Fund
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