Commentary: NCM Dividend Champions

TRANSCRIPT

Good day. My name is Michael Simpson. It is Monday, September 25th, and I am the portfolio manager of the NCM Dividend Champions Fund. Autumn is here and the leaves are changing colour. Seasonality, it seems, is part of the market.

According to the Stock Traders Almanac, from January 1950 to April 2017, the market in September has decreased by half of 1% or 50 basis points. The best month, according to the Stock Traders Almanac for the same monthly time period is December, with the market up an average 1.6%.

All this is interesting information that points to seasonality in the market. But the emphatic point to make is that we do not trade or invest based on seasonal patterns. We take advantage of opportunities and reassess positions or views all the time, 12 months of the year.

Central banks around the world have been raising rates for the last 18 months. The two central banks that are most important and influential to Canadians are the Bank of Canada and the US Federal Reserve. Canadian ten year bond yields have risen from 2.72% in March of 23 to the current rate of around 3.99.

The five year Canadian bond has increased from 2.77 to 4.25%. The five year bond yield is a good proxy for the rate that Canadian five year mortgages are priced off. In the US market, the ten year bond yield has risen from 3.3% in April to its current rate of 4.51. The two year bond yield has risen from 3.76 in March to its current yield of approximately 5.1%.

So what we can see from this observation is the yield curve, especially in the middle part of the yield curve, is becoming less inverted and that longer term is good for stocks.

Let me take you back a few years. A few years ago, the US government, in the form of the US Treasury, decided to issue bonds in June of 2020 with a 1.25% coupon. These bonds recently traded at $47.22. In other words, the value of the bonds has declined by more than 50%. Yes, that is a paper loss of 50%. Some market watchers believe the US Treasury bond market could decline for the third consecutive year, which would be unprecedented. The point of this example is to show that bonds can also generate capital losses.

How do we deal with a macro environment where there is more uncertainty? The uncertainty can be caused by the war in Ukraine, by the west’s changing relationship with China, AI, etc.

We think even though inflation expectations have come down, there may be an economic environment in which inflation lingers and growth slows. Our base case assumption is that at most there may be only one more interest rate increase and then both the Federal Reserve and Bank of Canada will start to lower rates in mid 2024, our best estimate.

So how do investors fare in an environment where growth slows and inflation remains above 3%? The answer is through Dividend Champion equities. One such company is Andlauer Health, which has a strong moat around their health care and logistics business, and recently raised their dividend by 12.5%. On a similar vein, Cargojet, which has a 90% market share of the overnight cargo business in Canada, has declined 55% from its highs. Cargojet has doubled its revenue since 2019 and trades at seven times EBITDA, well below its historic averages.

The aspect of fixed income that needs to be repeated is that the coupon or interest rate is set and fixed. So there's always reinvestment risk. A Dividend Champion, on the other hand, may have a lower starting yield, but if it is a Champion, it regularly increases its dividend every year and offers capital appreciation.

The current environment, which many of you observed, has been a bear market for dividend stocks. As a result, this has made me more bullish because valuations have come down and we are near the end of the rate tightening cycle.

As always, whether it is for companies or individuals, we watch debt levels. TransUnion reported that at the end of June 30th, 2023, Canadian debt levels increased 4.2% to 2.3 trillion, and the average Canadian credit card balance outstanding was $4,000.These are inputs that we reflect into our valuation models.

We know there's a wall of worry out there. You can name your risk. But the VIX index, the so-called fear gauge, has only risen from 12 to 17.3. Over the next several weeks, volatility may indeed increase. Do not let emotions and fear make your investment decisions. Rather, let the fundamentals rule.

We see opportunity in volatility and are selectively deploying cash. Dividend Champions can withstand any economic environment and we are positioning the fund for slower but positive economic growth and in some sectors - rail and trucking - it appears that we have reached the low point of the freight recession.

As always, stay invested and thank you for your support of the NCM Dividend Champions.

Disclaimer:

The information in this video is current as of September 25, 2023 but is subject to change. The contents of this video (including facts, opinions, descriptions of or references to, products or securities) are for informational purposes only and are not intended to provide financial, legal, accounting or tax advice and should not be relied upon in that regard. The communication may contain forward-looking statements which are not guarantees of future performance. Forward-looking statements involve inherent risk and uncertainties, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.