Michael Simpson, CFA webinar – NCM Dividend Champions

TIMESTAMPS

0:00 Dear Financial Advisors commercial
1:03 What is a Dividend Champion?
3:53 Is every holding dividend-paying?
4:51 How did you produce positive results in a very tough 2022?
7:06 What was your cash position and what was your best idea last year?
9:09 Is a recession coming and how are you positioning your portfolio now?
11:41 Are rising rates good for Dividend Champions?
13:29 What's your US exposure and which sectors are you avoiding or finding attractive?
15:24 What are some Canadian sectors or stocks that you’re liking or perhaps avoiding right now?
17:15 What is the turnover of the fund?
18:06 How does NCM Dividend Champions complement holdings in passive ETFs?
20:13 How have you made market volatility your friend?
23:12 What would you say to an investor who’s sitting on the sidelines? When is the right time to invest in Dividend Champions?
25:17 Where does this fund fit into an advisor’s book of business?

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TRANSCRIPT

Marco: Hi, everyone. Thanks for joining us today. My name is Marco Manella. I'm VP of Regional Sales at NCM Investments, and at NCM Investments, we are passionate about dividends. We have three of the best dividend managers in the country.

Today, we're going to talk about North American dividend investing. And I'm excited to have award winning portfolio manager Mike Simpson with me here today. His performance is truly incredible. This October, Mike will be celebrating his three year anniversary with NCM Investments.

So why don't we get started? Mike, you manage the NCM Dividend Champions portfolio. Tell us about this portfolio. What exactly is a dividend champion and what do you look for in the companies that you invest in?

Michael: Well, thanks, Marco, and welcome to everyone. A dividend champion is a profitable company that consistently pays dividends and also grows dividends over time. So we know that the economy only grows at a certain rate, but well-managed companies, despite what's happening in the economy, slowing, expanding, the economy going flat, they can continuously raise their dividend like clockwork every year. This is important. If the chart master would go to chart four, what you can see with dividends, you get paid, which is very important.

We are an aging country society, so dividend growers dramatically outperform the market. The dividend champions outperform dividend payers. And of course they trounce the dividend non-payers.

So this is important, but also for advisors who are listening to this call, there's what's known at NCM as the “sleep well” factor. If the chart master would go to slide five. What comes with dividends is lower volatility. So on this chart you want to be on the far left. The dividend growers have lower volatility, lower volatility allows you to sleep nights, take less calls from your clients worried about the market. The overall index, you know, you can see the volatility 16.5, the non dividend payers quite high. The dividend cutters you don't want to be there, also quite high.

If chart master would go to chart six, over long time periods, which we have more data from the U.S., it shows that the dividend growers really trounce the overall market. So you want to be on the winning team, you want to be on the winning side of history and that's what you do with dividend champions. These are companies that hold up in all weather and it's important that you just don't buy a dividend Aristocrat index, because what we do at NCM is we're constantly monitoring these names.

So just because a company has paid a dividend for the last ten years, it's no indication of what they'll do in the future. So we're constantly monitoring what's in our portfolio. All the, you know, within the Dividend NCM Dividend Champions Fund, and we're avoiding the names like the Algonquin Power that had to cut their dividend by more than 40%. So you lose your dividend income and you also had a dramatic reduction in the share price.

Marco: Thanks, Mike. I have a question just came in from an advisor saying is every holding dividend paying?

Michael: That's a great question. We've identified some fantastic companies that have great franchises that aren't paying a dividend, but the ones that are not paying a dividend, there's only about two or three in the portfolio. It's less than 4% of the portfolio. It is our expectation that within 2 to 3 years they will be paying a dividend. So we're allowed we have the flexibility to invest in non dividend payers, but it is our expectation within a relatively short period investment horizon speaking, that these companies that are generating copious amounts of cash will begin will actually start to implement a dividend. So that's a key question. But over 95% of the portfolio is in dividend payers.

Marco: Okay, Excellent. Thanks, Mike. Why don't we take a moment now and look back? Okay. Let's look back at 2022. It certainly was a difficult year for investors. And when you look at 2022, it was the only time, the only year in the last 100 years where both stocks and bonds were both down double digits and a lot of investors were down double digits. But somehow you managed to have a positive 1.5% return. How were you able to deliver these positive results to your investors and what contributed to that incredible outperformance in 2022?

Michael: Sure. If the chart master would go to slide eight, it starts with a process. We don't get this by luck or happenstance. We design portfolios that actually are better, that can withstand tougher times very well. You know, our portfolios have said, well, you know, you're too ballast-ready you're too ready for any upheaval in the markets or the economy. That may be true - in roaring bull markets, we will underperform. But what we do is we look for free cash flow. It's our definition at NCM. It's not the company's definition. We make sure that the company has ample cash to pay interest, to reinvest in the business, to pay dividends, to grow their business.

How how do we get there? A company must have a strong balance sheet. So all of the things that I mentioned above, you have to have. If a company is too levered, if we start a rising interest rates cycle, those companies will be hurt. Dividend growth is great to pay a dividend. Can you maintain and sustain that dividend? And also can you grow that dividend?

So companies that you know can grow their dividend every year like a Fortis, like a Parker-Hannifin, like a CP, where we're interested in those names, we own those names with great enthusiasm. So it starts with a process. It starts with a discipline. We have it with the NCM Dividend Champions and it happens through hard work and dedication, not by luck.

Marco: Thanks, Mike. A couple of questions coming in from advisors on 2022. I think there's a few that are certainly impressed with your results last year. Let's stay in 2022 for a minute here. I’m going to ask you two questions on 2022. What was your cash position last year and what was your best idea in 2022?

Michael: Yeah, cash position varied throughout the year, so it's tough to give you a 100% accurate figure for cash, but on average it ranged between, I would say 7 to 9%. So I did have a good chunk of the portfolio invested. So there were dividend champions when people had given up on on oil and gas. Tourmaline, they paid three special distributions in 2022 and they also raised their dividend by a staggering 94%. That's just their base dividend. So you have a base dividend increase of 94% plus three special distributions.

They're also quirky names like Amerco. Amerco’s the parent of U-Haul. U-Haul has the second largest network of public storage units. So earlier in the year, public storage, you know, the big player in the space bid for another company. And they, based on those metrics, you were getting U-Haul’s public storage units at no cost. So we said, you know, that validated our thesis. That did extremely well.

There are other names where we, you know, we recognized, you know, there were short term upheavals in the market with European natural gas. So we did well with Vermilion. We don't own that anymore. There were some industrials, but, you know, we weren't caught up in owning some of the high flier technology names that really had a very difficult 2022.

But we're proud of what we did. But it wasn't by taking any excess risk or overweighting or over dominating certain sectors.

Marco: Thanks, Mike. I know your clients are extremely happy with their experience in 2022. We just looked back. Now let's look forward. Okay. Investors are hearing a lot about recession. Okay. So what do you think? Is a recession coming? Should investors be worried and how are you positioning the portfolio based on your outlook?

Michael: Well, recessions are natural. They're part of the business cycle. The great business commentator Louis Rukeyser, always said eventually they will come. So eventually is the key word. It's an adverb.

Right now. We're not seeing evidence of a recession because we have lots of people working in Canada and the U.S. We do have wage growth, nice, robust wage growth for a lot of people that missed out over the last two decades.So that's good for consumer spending, that's good for the economy. So right now, I don't see a recession. You know, if you ask me, six months from now, you may get a different answer, but I don't see it right now. But, you know, in spite of what I see, because I'm not an economist and economists and strategists, you know, they have professions where they could always be wrong when they're saying, well, I don't see a recession, but we have a portfolio. So we built a portfolio.

If the chart master would go to the chart on slide 12, a company like Waste Connections, they're going to pick up the garbage in Missouri if there's a war in Europe, if there's missiles being fired in the Sea of Japan. So this is a great business. They have franchises in western U.S., they have business in Canada. They grow their dividend. Landfills are very tough to build in urban areas, especially the eastern part of North America. So we like this company a lot. If the economy stays strong, their volumes are good. If we go into a slower growth period, the garbage still has to be picked up, might be a little lower volumes, but they can still pay their dividend and they can still grow their dividend over time. So this is a company for all seasons, well-managed.

So, you know, this is just an example of our approach, our philosophy to investing. We don't have to get all sussed up about artificial intelligence and try and pick the next winner and try and, you know, use momentum as our guide. No, we just stick to solid established businesses.

Marco: Thanks, Mike. I can't believe how many advisors are joining us. So many familiar faces. Great to see and lots of questions coming in. One of the questions, maybe I'll ask it now: are are rising rates good for dividend champions?

Michael: Well, you take the premise that all assets are interest sensitive. So we believe at NCM that we're closer to the end of the rate tightening cycle.

So you have some companies like I mentioned, waste that can pass through higher costs. They have CPI escalators. So CPI rates are rising because CPI is rising, then a company in the waste industry can raise rates. Also a company in the rail industry, the rail industry’s magical, it's great, they get to raise their rates every year at CPI and then sometimes more.

So the answer to your question is rising rates impact so many areas of the economy, from consumers to businesses. But it's our view that we're close to the end of the rate tightening cycle. And, you know, so far with 500 basis points rate increases, you know, the companies are still doing well. They're surviving. At some point, certain companies that have passed on prices maybe a little too aggressively won't have that option or privilege or luxury anymore. So I would say if rates keep rising indefinitely, that's not a good thing.

But the house view at NCM is that we're close to the end of the rate tightening cycle, and that will be a major boon for the market and especially dividend champions.

Marco: Excellent. Thanks, Mike. So we talked about dividend champions. We looked back and we looked forward. Now let's talk about geographical breakdown and sector breakdown. Your portfolio is a North American portfolio. So why don't we begin with the U.S. Where are you at right now in terms of exposure to the US? How high can you take that U.S. exposure? And then within the U.S., any sectors you're avoiding or sectors that you find attractive?

Michael: Yeah, right. Right now the U.S. weighting is 25%. So we're nibbling away at I mentioned technology earlier, but some of the some of the more mature, established technology companies like a Fortinet, which provides security online software security, a Texas Instruments, which is very big in the analog chips. Those chips are semiconductors that go into your refrigerator or other devices. So, you know, they're they're a powerhouse, you know, very disciplined. Texas, TI, doesn't do a lot of acquisitions, they just grow internally, so I like that.

We're looking at the health care space because let's face it, the health care space in Canada is very limited. You know, there's a lot of cannabis stocks which we don't invest in non-profitable companies, but a company like a Medtronic Medical Devices, which you don't have such a company in Canada, or a great dividend champion, great triple A balance sheet, Johnson and Johnson. So we do that.

But since we're talking health care in Canada and I maybe minimize it too much, we own a great company, Andlauer Healthcare, and I'd just like to congratulate my friend Michael Andlauer on purchasing the Ottawa Senators. So Andlauer Healthcare has got quite a niche in Canada, and I think you'll continue to grow that business.

Marco: Okay, excellent. And on that, why don't we shift from from the U.S. to Canada? So if we if we drill down and look at the Canadian exposure, talk to us about maybe some sectors or some stocks that that you like that you're finding attractive and maybe some sectors in Canada that you're avoiding?

Michael: Sure. So we take a fundamental approach. We look at the bottom, but we don't ignore the macro. So when you drill down, you see that there's some good value in financials. But we're a little bit concerned about the consumer. We do see despite, you know, different evidence, we see some evidence of a, you know, a growing stable economy. We see some evidence of a slowing economy, i.e., in freight. What we're hearing from the trucking and the rail companies, you know, is it a dramatic slowdown or, you know, does that mean there will be a worst case recession scenario? No, we'll definitely get a slowdown. So I'm a little bit wary of the trucking industry right now, even though there are some great companies in there.

I want to stick with the rails because a company like CPKC, there's a number of synergy benefits. They'll be telling investors all about that at their upcoming Investor Day at the end of this month. Pharmaceuticals, you know, in the US, I see some opportunity. I want to be cautious there and technology, I see some opportunities as well. But in some of the more mature, quality names, people would recognize them, but not the names that are making the headlines right now for reasons of artificial intelligence. So those are some of the sectors.

Marco: Okay. And here's a question from an advisor. What is the turnover for this fund?

Michael: Yeah, turnover, historically, I will have a three year number come October. The early years are skewed because we just had to transform a, you know, a good fund, but a former fund that had more of a small company focus into the Dividend Champions, which is skewed by large, but also in essence all cap. There's a lot of large, there's some medium and maybe even a small amount of small. So the turnover should range in the 20 to 25% range on an average basis. Some years it may be bit higher, some years a bit less, but that's the average. That should be the average over time.

Marco: All right, excellent. Here's one: A lot of advisors are using passive ETFs within client portfolios. Now, your portfolio is incredibly active with an active share of 78%. And it's a very high conviction portfolio with 44 holdings, 44 of your best ideas. You have this high active share, you have this high conviction. How would NCM Dividend Champions complement a passive strategy?

Michael: Well, basically, you described it very well, Marco. This is a active portfolio. It has some quirky names like a U-Haul that aren't in the indexes. We're not buy and and perspire. We look at a company, we assess its quarterly results every three months. We meet with management. We look for new ideas. We're constantly assessing what we're doing. We're constantly measuring the performance of our investments.

So, you know, it will complement a passive strategy by its very approach, by its North American approach, where, you know, we're going to have anywhere from 25% to maybe 45% in U.S. names. So that's quite unique. It's quite hard to find that in an ETF. I haven't found a North American ETF that's structured like that. So it's a great complement to an advisor who just wants to have the SPY and then also have more of their exposure to Canada, or the other way around, someone just buying the TSX 60 and they have exposure to different names in the TSX like a Calian Group and also other names, a sprinkling of U.S. names. So you're getting the best of both worlds and a unique income-oriented product from NCM.

Marco: Okay, why don't we spend some time talking about volatility. Market volatility tends to make investors uncomfortable. Volatility makes investors nervous and makes investors do the wrong thing at the wrong time. Can you talk to us about how you maybe make volatility your friend and maybe how you've used volatility or exploited some overreactions in the market?

Michael: Sure. So if the chart master would go to Slide 14. So volatility is your friend because when the market overreacts, you can step in as a disciplined investor and buy shares on sale. You know, we all like to buy our favorite shirt or pants on sale, but when it comes to a stock that we bought and we see a drop, the average investor gets nervous and a lot of times they may do what's really intuitively opposite and sell as opposed to buy more. So when you're a fundamental investor, when you know the companies you invest in, when you follow the news, when you read the news, when you interpret the news, if there's bad news, okay, you assess it. But many times in my career, the market overreacts to bad news.

So if it's slight bad news and the stock is down 3, 4, 5%, I'll step in and buy. Because if the bad news is temporary or can be corrected or fixed, that turns out to be an opportunity for me. Similarly, when there's excessive optimism, when there's excessive giddiness, I tend to sell. I could trim our positions. When I have a core holding in a portfolio, I'll trim it. I won't take it down to 1% because, you know, below 1%, you're not doing much to the portfolio. But at a 1% weighting, I'm saying I still like this name. It's good quality, but I just don't want to add more here. So really the 1% is the anchor.

It could also turn out that if a company is not performing and I've reduced it several times to 1% and it still isn't meeting my expectations, I'll sell it. I won't just keep an underperformer at 1%.

But volatility, we've witnessed volatility both in the equity and bond market. So you use it as your friend. You know, recently the VIX got to as low as 13. It's up a bit now, but by historical standards it's right about the average level. So, you know, we'll see what happens. Sometimes you get correct signals from the VIX index, sometimes you get incorrect signals. So that's all I'll say. But we react to earnings where there's an overreaction and we monitor news and we monitor some of the gyrations in the market that to us seem unnatural.

Marco: All right. Now, what would you say to an investor who's nervous, an investor who's maybe sitting on cash, who's on the sidelines, worried this recession is coming and I'm going to try to time it perfectly. I'm going to wait for this recession to pass. When when is the right time? When is the best time to invest in NCM Dividend Champions?

Michael: So I like baseball. And before the Blue Jays, I liked the greatest hitter of all time. His name was Ted Williams. He is the last professional player to hit 400. You think of it, you're only successful basically four out of ten times. So Ted Williams would never wait for the perfect pitch. He would hit the ball when it was in a zone for him and his zone was quite wide.

So how that applies to investing right now is you have your eight or nine highly hyped, highly publicized stocks. When you look at the “S&P 490,” the valuation is actually quite reasonable, it’s at about average levels. We can show you a chart if the chart master goes to the chart on Canada. I think it's chart 11 or 12. Canada is cheap relative to the US. So there's reasons to be invested in Canada.

So, you know, if you want to get wealthy over time, it's time in the market, it's not timing it. Don't wait for the perfect ideal moment because guess what? I've been in this industry for more than two and a half decades. There never is the perfect time to invest. You know, you can dollar cost average. You can put some money into the NCM Dividend Champions today, some money in a month and some money the following month. But then you'll never find the perfect time. So you invest now and you leave it to seasoned professionals like the ones we have at NCM to deal with the volatility of the market.

So I would say that, you know, don't wait for the perfect pitch, don't wait for the perfect moment. Invest now and invest for your future.

Marco: That's a great answer. And I think we have time for one more question.

Michael: Yeah, I'd like to ask the question, Marco. So I get to see advisors, but you see far more advisors than I do. So given the NCM Dividend Champions coming up to a three year anniversary, where would this fit into an advisor's book of business? Where would it fit into the advisor's portfolio?

Marco: Okay, good question. I think first off, it's a core holding. It's 100% North American equities. Number two, I'd say it's a diversifier, you know, with a high active share. It's different than the benchmark, different than the index, different than mainstream mutual funds. It's different than what clients already own in their portfolio. And then third, I would say it's a defensive equity strategy. Everything that goes in is quality. So for nervous clients, for anyone who might be uncomfortable, it's a great solution to enhance return potential, maybe decrease the downside and create a smoother experience for investors.

So better returns on tougher days, smoother experience for your clients, which means it's easier for them to stay invested and ride out, get through periods of volatility, recession and inflation.

So, Mike, to answer your question, where does it fit? I believe NCM Dividend Champions belongs in every client portfolio.

So maybe with that we’ll kind of close it out and I want to thank you, Mike. Thanks for your time.

And I want to thank all the advisors who are joining us today. We know you have a lot of choice in how you spend your time and you have a lot of choice on webinars you attend. So thanks for attending this one today. And we believe that investment advice is more important now than ever. So thank you for the work that you do. Thank you for the advice that you give.

If you need any more information, please reach out to your NCM sales rep or send a note to sales@ncmnvestments.com. Thanks again and have a great day.

Michael: Thank you. Goodbye everyone.

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