Commentary: NCM Dividend Champions

TRANSCRIPT

Good day. It is Monday, November 20th, 2023, and I am Michael Simpson, portfolio manager for the NCM Dividend Champions Fund. 2023 has been a tumultuous year. In the US, the technology weighted NASDAQ is up by approximately 35%, the S&P500 17% and the TSX 4%.

The US market has been led by the Magnificent Seven. Most of these names you are familiar with. Microsoft. Amazon, and Alphabet, parent of Google. Honorable mention goes to Nvidia. In Canada, the stars have been Celestica, increasing by 154%, Cameco up 101%, and Shopify increasing by 100%.

The top ten stocks in the S&P 500 represent 34.6% of the S&P 500. This statistic shows the high level of concentration in the S&P 500. This is higher than in the 1970s and the Nifty 50 era.

Macro events continue to shape the world we live in. The Russia-Ukraine war continues with no clear winner in sight. The Israel-Hamas war shows the fragility of peace in the Middle East region. In Canada, a recession is declared not by the financial media, but by the CD Howe Institute. In the U.S., the National Bureau of Economic Research dates business cycles, both expansions and contractions, and declares recessions.

In Canada, GDP contracted by -0.2% in the second quarter of 2023. The initial monthly GDP readings for the months of July and August is not robust as they are showing 0% or no growth.

We are watching economic developments closely in Canada and more importantly in our conversations with company management teams. We are hearing about a slowdown in spending on luxury and discretionary items. We are also hearing that inventories are rising and that wholesalers in many sectors can't take on more goods, even at reduced prices because their inventory is also full.

What we are hearing is that high interest rates are dramatically slowing consumer purchases in Canada. This is why we believe the Bank of Canada will reduce rates in 2024. As a result, we have positioned the portfolio in anticipation of an economic slowdown and slower growth ahead.

Our energy position is a combination of producers, royalty companies and energy infrastructure companies. We see good value in this sector and the potential for good dividend growth in the future. Also, as you compare valuations in Canada and the U.S. market, we see better opportunities in Canada and have reduced our U.S. weight to 20%.

As interest rates decline, which we are forecasting in Canada, because of these structural impediments to growth, we expect the utility and REIT sector to perform better than they have in 2023. What are the structural factors in Canada? One, higher debt per capita among our citizens. Higher business debt. Lower productivity. And in Canada, we utilize five year mortgage terms, compared to the 30-year U.S. mortgages that they use in the U.S.

As there are ongoing efforts to improve the electrical grid and automate manufacturing and industrial processes, we have invested in several industrial companies that will improve and strengthen the electrical infrastructure and companies that will make manufacturing process more efficient.

A small glimmer of hope on the macro front is the leaders of the two largest economies in the world, the U.S. and China, met recently in San Francisco. Although this meeting will not lead to immediate good times and good relations, it is a start and a step back from open hostility. The China-U.S. relationship will evolve over time and a key early test will be the elections in Taiwan.

Investors and fund unit holders often ask me, Is now a good time to invest? After more than a quarter of a century in the investment industry, I can confidently say that it is never a “bad” time or a “good” time to invest. It is just “putting your money to work” time. Now, the longer your money is at work, the more chances you have of achieving success. With the Dividend Champions, we have been successful over the last three years.

Another question I get is with interest rates at their current level, why don't I just sit in cash? I can give you some perspective. Back in 1981, Canada Savings Bonds, which they don't have anymore because they're very expensive to run, were offered at 19% in 1981. In 1982, the rate came down to 12%. So in order to answer my earlier question, no one can successfully time the market. With bonds and GICs, you have reinvestment risk. It is our view that one year from now interest rates will be lower, thus giving the investor reinvestment risk.

Secondly, Dividend Champions pay a dividend, which in many cases is lower than current interest payments. However, from a tax perspective, it is more efficient with the dividend tax credit on Canadian dividend paying companies. You get to keep more of your after tax income. Remember, it's what you keep and can take home. It's not the front page yield that you're getting.

Lastly, bonds and GICs pay a fixed coupon. It will never rise, but with a portfolio of Dividend Champions, you get the chance to participate in dividend growth from companies such as Fortis, Capital Power and Emerson Electric, who has raised their dividend every year for 68 years.

Fads and momentum will come and go, but we have not changed our style, discipline or process. Portfolio management requires day to day management and we never go on autopilot at NCM.

In closing, I would like to congratulate the 2023 Grey Cup champions, the Montreal Alouettes. Thank you for your continued support and stay invested.

Disclaimer

The information in this video is current as of November 20, 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.