Hello and welcome to The Download. I’m your host, Dave Richardson, and I am joined for (S)Tuesdays on Wednesday by Stu Kedwell. Again, we’re going to get this scheduling thing right at some point Stu. But we’re busy, folks. So hopefully people are tracking along with us, not getting upset about the (S)Tuesdays delays.

Whatever the day, thanks for having me.

Great, thanks Stu. And let’s talk about a couple of things. One, let’s get to dividends, from last week. But first, we were just chatting before we started recording around valuations and there’s been some really good news out in markets, and investor sentiment has clearly shifted over the last few weeks. What are your thoughts on that?

It’s an interesting point. They do a survey each week where they ask investors: are you bullish or are you bearish? And many pundits have used this survey over time to compare it to Warren Buffett’s line, which is: buy fear and sell cheer. Which is when everyone is bearish. The thing that can change next is that they can change their mind and become bullish. And when everyone’s bullish, they can change their mind and be a tad more bearish. As a pure market timing mechanism, it’s not that great, but it is indicative of where people have moved from one side of the boat to the other. As you point out, in the last couple of weeks, the underpinnings of the market remained in place with an accommodative central bank and governments looking at doing the right things to bridge the economy to the other side of the vaccine. And then, some fantastic vaccine news! Not to say that we didn’t expect it eventually, but the efficacy was better and the timing was maybe a little bit sooner. Even this week, we got the Moderna vaccine, which logistically looks a little bit easier to get into the population. And as a result, when you have these underpinnings and then you get a bout of even better news on top of it, a bullish sentiment has really broken out, which means it’s gone to a relatively high level versus where it’s been throughout this pandemic. So, is that a cautionary flag? Hard to say, because the underpinnings are still pretty good. And as I say, it doesn’t point to an inflection, but it does point to the idea that a lot of people have bought in to the notion that while the headlines in the next one, two or three months on the vaccine are not likely to be very good, we can start to see the sunlight on the other side of the vaccine and how things could get back to normal. So that’s one thing that has come to mind in the last week, on that front. We did say we were going to talk about dividend?

Yes, I was just going to say, when you have valuations and bullish sentiment elevated, that creates an environment for volatility. For those who haven’t been listening to some of the previous podcasts we’ve done, we’re not going to belabor the point around dollar cost averaging again, but there are things that you can do in that kind of environment to improve your chances of success. And we’ve talked about that. So go back and listen to some of the other podcasts on that front. But also, when you have this kind of growth mindset in the marketplace, and perhaps we haven’t seen it swing this far since the late 1990s, early 2000, there’s almost a dismissiveness towards dividends and dividend stocks. Dividends, as much as anybody I know would suggest, are always a good thing to be looking at when you’re an investor.

Dividends are a meaningful part of the total returns that you’re going to get as an equity investor. Just like how we’ve talked about earnings that aren’t that volatile over long periods of time, dividends tend to not be that volatile either. As businesses grow, they tend to participate with the upside in the economy. I remember, back to the financial crisis, obviously as a Royal Bank employee and shareholder, we sat there and thought that in 2009 the Royal Bank’s dividend was two dollars a share, and thought how it might be four dollars a share 10 years later. Sure enough, it was. And so we look at the funds that we manage, and each year we’re collecting a tremendous amount of cash flow from all the businesses that we manage or that we own inside the funds we manage. For some of these dividend streams, we haven’t experienced growth the way that we would normally expect this year because of Covid, but again, on the other side of the vaccine, we would expect a lot of that growth to resume. When we think about the long-term formula of a dividend fund, you’re collecting somewhere in the neighborhood of 3.5 to 4% in current dividends, and in all likelihood those dividends can grow by mid-single digits over long periods of time, which drives pretty attractive total return. A good friend of mine sent me an analogy on a dividend investor versus a capital gains investor. The notion is that the dividend investor is the egg farmer. Every day we go to the barn, we collect the eggs and we do it all again the next day. As long as our chickens are healthy, the egg collection continues in perpetuity. Versus the chicken farmer who needs to take those chickens to the market and get just the right price on any given day. Volatility in the markets can be a little bit more challenging sometimes for that specific strategy. So when we look across the portfolios and, particularly in Canada where we do think it’s quite a good market to collect income in and generate some dividend growth over time, that’s something that we’ve been spending a lot of time looking at in recent months as there’s been a lot of enthusiasm for some of the growth companies. We could sit there and build a portfolio of stocks yielding us 4.5 to 5% with pretty good long-term growth prospects. It’s certainly been a focus for the team recently.

Yes, and in the face of 10-year Treasury yields in Canada and in the US at around 70 to 100 basis points, that’s quite remarkable. So, yes, it seems like dividends are something that some investors have forgotten, but that are always good to point back to. And the analogy is fantastic.

Onwards and upwards!

As the ad says, Stu, “eggs are not just for breakfast anymore.” So get cracking. The eggs and the dividends can be for growth investors as well. But thanks a lot, Stu. Always good to catch up. Hopefully we’ll line up on Tuesday next week. We’ll see.

OK, thanks, Dave.