Transcript
Hello and welcome to the Download. I'm your host Dave Richardson, and it is Stu’s days. This is a particularly special edition of Stu’s days because this is Stu’s days on the prairie for me. I'm in Regina, Saskatchewan. It's funny. I did a presentation for some realtors here yesterday. In the last month, I was in London, it was two degrees and pouring rain the whole time. Then I go to Greece; we should get good weather there, but we had 50 km/h winds and rain pretty much every day. Then I'm back in Calgary and Ottawa, and it's cold. And Montreal, last week, there's an ice storm. I get here yesterday and it's 20 degrees. Beautiful. That big, big sky you get out on the prairies. I had to get all the way to Regina, Saskatchewan in April to find good weather somewhere.
Yeah, well, no doubt it's beautiful, I'm sure.
Yeah. And you're doing well back in Toronto too, right?
Yeah, we're at 25 degrees and sunny. We'll take it.
I understand you're under a lot of pressure at home, and I might be the cause of it.
The endless debate about when to get your haircut, Dave, that's always the pressure at home.
Well, you should grow it out. You should go with the flow, Stu.
You got to get into the products and everything like that. Those are challenges for me.
The product is tough. And then if you happen to be at a hotel in Saskatchewan with no hot water, that presents its own challenges too.
I didn't want to say anything, but it did look like the shower was brief this morning, Dave.
As always, I’m glad this is audio only. I think we got a couple of really good things to talk about today, Stu. The first one is this morning; we get up and there's the inflation report out of the US. And because of what we've been through in the economy, this inflation report and how it's going to impact interest rates is so critical. And the report came out and it was pretty good, right Stu?
Yeah, on a headline basis, it was in line with expectations, but some of the underlying parts were a little bit better. Will the Fed go one more tightening or not remains open to debate, but certainly, seeing the end of interest rate tightenings. And I think also the reaction in the bond market was interesting because two-year interest rates fell a little bit more than ten-year interest rates, and that slope between two-year interest rates and ten-year interest rates— you take the two-year yield and you subtract the ten-year yield— we started the year at over minus 100 basis points which is the bond market's way of saying there's going to be a real clenching here and the risk of slowdown is high. And the way that we factor that in, if we're a bond investor, is we buy ten-year bonds because the economy is likely to slow down. And as the year has progressed, we're now at around the mid-fifties of negative slope. And that's really important from an equity standpoint because we'll be watching that and eventually, through this process, that slope will go positive. And that's the bond market's way of signaling, okay, monetary conditions are now maybe a little bit easier, the economy is going to do better, so now I need to not take my ten-year yield so low. I need to guard against maybe a better economy. We're not quite there yet, but there are certainly some signs. We like to see that two- to ten-year interest rate spread move less negative and eventually positive as time progresses.
Yeah, and as we've talked about many times with you and Eric Lascelles before, when you see that yield curve inversion— the shorter rates being higher than the longer rate— that almost always points to a recession or a pretty significant economic slowdown. And that remains the base case even with this announcement today. You're starting to see inflation slowly grind down. It's certainly moving in the right direction. And that hopefully leaves you where we've talked about before, with a relatively mild recession. Recession is a recession, but a relatively mild and short recession, which kind of resets everything.
I think that's a good point. And a couple of things just to add on that point as well, is that some of the deposit data in the United States has settled down a little bit, which is good. On the other side, some of the lending data does show less lending from the banking system, which leads into that slowdown type discussion. But again, to your point, a modest recession is certainly a better outcome and things do seem contained and a bit more normal than some might worry about.
And the stock markets have actually done fairly well recently.
They have. And part of that is that there has been some additional liquidity around and when the economy is not using it, sometimes it finds its way to markets. And the second thing, as rates have fallen, some stocks that either have healthy dividends, their valuations have been supported, or some of the stocks that have very strong margins, quality-oriented companies, they've seen a bit of a benefit on the valuation front.
Well, that's a great segue into where we wanted to go next. We were at an event last week together and we took a question from the audience, and it was around Canadian dividend stocks, which I know you've been heavily involved in and investing in for a long time. And the question was: why are Canadian dividend stocks so special? I know dividends work everywhere, but it seems like in Canada, we're particularly blessed with some really good dividend paying stocks.
Yeah, I think it's a couple of fold. Definitely the investment community here is very focused on them. Management teams take them very seriously. That's first and foremost. When I started in the business, someone used to say that US companies raise dividends to cut them. It was just a function of some of the cyclicality in the business or returning cash flow to shareholders. But a Canadian dividend was like marriage. It was something that was quite significant. When you look at long-term equity returns, the two biggest drivers are earnings growth and cash flow through dividends. So in some markets, growth receives a higher premium and you tend to get lower payout ratios. Versus in Canada, you tend to get a little bit more of your total return through the dividend when it comes to long-term investment. And there are some modest tax advantages in Canada to dividends. But generally speaking, within the companies in the Canadian market, we do have the benefit of a lot of stability and a lot of quality. And in each business, in each industry, there's often just a handful of companies that are in the marketplace. And that focus on quality and stability really shines through. You have three grocers in the market. You have six banks. What have we gone through in the last three months? We have six banks in Canada; there are 2500 in the United States. So say what you will, but the stability of rational competitors provides a lot of benefits at different points of the cycle. And when we go through and look at a variety of Canadian businesses, that tends to be the industry dynamic. You might get less earnings growth over time, but you do end up getting more dividends.
Yeah, and then Stu, just to piggyback on that, we're here in an environment where rates have risen significantly over the last year, but we're likely getting closer to the end of those rate hikes. Long-term rates have already settled back a little bit and as we've talked about, have remained pretty well anchored through the entire process after the initial rise. Is that a good environment for dividend paying stocks? Or again, is it much more about, in one sector it may be a good thing, in another sector it might be a bad thing? But more in general, is it good for dividend stocks, this environment?
It's generally good because the cash flow that you're getting improves in a lower interest rate environment. But I think it's important, there are different types of dividend stocks. There are some that have higher yields and maybe not as much growth, and they benefit a little bit more as interest rates fall. And there's others that have more middle-of-the-range-type dividend yields, but those dividends tend to grow over time. Those are the types of companies that we favor over the long haul, because they're kind of all-weather-type stocks versus being worried if I have too much of this now and too little of that later. But generally speaking, when rates are falling or stable, the constant yield that comes from your current dividend, plus the growth over time, delivers a pretty reasonable total return. And in particular, we've been through an inflationary environment, if that dividend growth of the whole portfolio can be greater than inflation, then we've preserved the purchasing power of those cash flows that are coming to investors.
Yeah, and then the other nice thing about dividends is that you get that payout. The company has to make that payout when they commit to it. And then if you need income, it's a great source of income. But getting to a DCA, we can drip, right?
That's right. Two great points. We can put our dividends on dividend reinvestment, in which case we buy stocks of the companies that are paying us, or we just take the cash into the portfolio and reallocate it to the things that look attractive at the time. So it's a really beneficial tool. And when you look at some of the size of the funds under management and you think about receiving 3 or 4% in cash each year, it's putting a lot of money to work. So being able to select amongst good quality businesses that might be out of favor, it's kind of like you're naturally taking from some that might be doing quite well and reallocating to better the odds of good performance going forward.
Excellent. Well, I know you've got a particular passion for dividend stocks. It's been a critical element of your investment approach and something I've learned a lot from you. And I thought your answer last week was perfect. Spot on, again this morning. It really highlights some of the advantages of dividend paying stocks and again, the advantages for different types of investors as well. So thanks for that, Stu.
You got a bunch of ex-dividend dates in your calendar; you might otherwise be a boring individual, but those are pretty exciting days for dividend fund managers because that's the day that the checks come in.
I often wonder about your childhood. I feel like maybe your parents forgot your birthday and Christmas, which is why you like getting these presents through dividends all the time.
That's right. Thanks very much, Dave.
Okay, thanks, Stu. We'll talk to you next week.