February 01, 2023
Webinar Replay: Your Guide to Dividend Season
Position your clients to overcome volatility, inflation and recession with dividend solutions from NCM.
At NCM Investments, we believe that now is the time for dividend investing. That’s why we’re calling this Dividend Season.
Webinar hosted by Wan Kim, Senior VP, National Sales and Marketing and featuring:
Michael Simpson, CFA
Portfolio Manager | NCM Dividend Champions
Alex Sasso, CFA
Portfolio Manager | NCM Income Growth Class
Jason Isaac, CAIA, CFA
Portfolio Manager | NCM Global Income Growth Class
Wan: Hi, everybody. Thanks for tuning in. My name is Wan Kim. I am the head of sales and marketing for NCM Investments. Today is Wednesday, February 1st, 2023. And I'm here to talk to you today about Dividend Season. I'm joined today with three of the best fund managers in the country and each bringing their own unique perspective on things.
For his thoughts on Canada, we've got Alex Sasso joining us, who manages NCM Income Growth. North American investors will recognize Michael Simpson who manages NCM Dividend Champions and our global investing. We have Jason Isaacs who manages NCM Global Income Growth. We've been collecting a whole bunch of questions, talking about what we're calling Dividend Season, and there's a whole bunch of things and thoughts that everyone has on their minds.
What we've decided to do a little bit differently this this webinar is lean more on our mutual fund wholesalers who have been highly engaged working with you, the advisors in our community. The first question actually comes from Joe Varone in Calgary, and he's talked to a whole bunch of advisors in his territory, which is Alberta and Saskatchewan. And his whole question is about volatility. I'm going to kick it off with Jason. So Jason, as a global manager, what are you doing to manage volatility?
Jason: Great question. Well, I've basically got four levers that I that I that I utilize. Two of them are structural with the nature, with the way the fund set up, and two of them are a little bit more nuanced as to the way I manage.
I'll start with the structural. This is an asset allocation strategy. So I do have the ability to go to cash, go to fixed income, go to equities, and that in and of itself dampens volatility so that helps. The other aspect, as we all know, is global investing. When you add global securities and global and international foreign currencies to a portfolio, you drive down volatility.
So there's diversification benefits in that. So those are just the nature of the portfolio, which by the set up dampens the volatility. So that's a check. Check. But some of the other things, if we can have the chart master throw up slide four. One of the things I like to look at is where are we going to swim when we look for possible assets and or investments?
What I spend a lot of time on and throughout my career, that top line that you see there, this is basically the S&P 500 going back, you know, a number of years back to 1973. And they basically decile rank them or ranked companies in the S&P 500 as they existed into growers and initiators all the way down to just the equal weight S&P 500.
And what we found is that companies that specialize not only in paying a dividend but growing that dividend and or starting one tends to be the best pool to actually swim from from possible assets. You kind of hit that nirvana of investing. Not only do you have the best possible return, but you achieve it at the best possible risk metric, whether you use beta or whether you use standard deviation, you've got the best risk return metric.
When it comes to the equity investment that I put in the portfolio, I tend to lean there. Doesn't necessarily mean every name has to be have a dividend, but it has to have a strong free cash flow profile and an expectation that it will maybe initiate. So that's that's another one. And then the final one is a little bit more nuance to what I do.
And if we would like to slide move over to slide six. What I find, depending on the market cycle, we do a lot of work where we are with growth and inflation. And as we all know, inflation's quite high and the Fed's going to come out today with a with with the statement and talk it down and make sure the market's not ahead of itself.
But inflation is in a better space than it was a year ago. And so we've got a partner research firm that we use and we just decile rank where growth and inflation are and growth and inflation have come down relative to where they were. And when we're in this scenario, what we find is we then look at individual sectors and we rotate from sectors that are expected six months out to do poorly into sectors that are six months out, expected to do better.
And in this particular instance, keep in mind this is not necessarily the be all and the end all, these sectors change depending on where we are with growth and inflation, you'll have a completely different outlook. But what this does that I wanted to highlight with the original question and just bring it back to that cycling from sectors that look like they're going to underperform to sectors that do look like they're going to outperform tends to dampen the volatility in the equity component of the portfolio.
So that in a nutshell are the four things. It's asset mix, global investing, dividends, initiators and growers. And then what sectors are expected to perform those four things. It's a dynamic process, but they do dampen the volatility.
Wan: Okay. Thank you, Jason. So same question to you, Mike from Joe Varone’s clients out west. Volatility, what are your thoughts on volatility from a North American perspective?
Michael: Okay. The volatility is commonly measured by what's known as the VIX Index. It's also known as the fear index. And if the chart master can bring up a slide seven. So when we look at volatility over many long periods, what we've found and what I've found in my career is when you're buying at the peaks, when volatility spikes 12 to 18 months later, you've done very well.
So in my how I manage a portfolio, I see volatility coming from two sources, internal and external. Internally, we know there can always be company specific events and also companies report their earnings four times a year. So there can be noise or volatility around earnings releases. We take advantage of this. We pride ourselves on knowing the companies in the portfolios very well.
When there's an overreaction to an earnings, if the market sentiment is so negative that a small miss turns into, you know, a percentage gain that we think is over warranted we’ll step in there and buy. Macro events impact the whole market. So we take advantage of those because if you're picking up garbage in Midwestern U.S. and an event in Far East Asia will have little to no impact, I would say no impact on your business.
So we use that. We use volatility as our friend. We take advantage of that. If we can go to chart with the chart, master can go to chart seven, Slide seven, We can see we all know that we had a very bad year. It was a tough year in the markets in 2022, the S&P 500 was down approximately 18%, the TSX about 8%.
We had this is U.S. data following a 15% loss. What we see is growing over 90 years. The return and the average return one year later is about 10% following just following, any type of loss, 74% of the time, the market’s up on average about 13.2%. So what we can see from this chart is, yes, 2022 was a bad year.
It was a volatile year. NCM Dividend Champions did better than the market. We're proud of that. We're not you know, we always need to look forward and keep investigating the markets. But the important thing is to keep losses in their perspective. And volatility in the market is really associated with losing money or losing your capital. So we think when there's a volatile period, there's usually a settling or cooling out period. Then markets have a chance to rebound in the following time periods.
Wan: Thank you, Mike. Okay. The next question is actually coming from clients that work with Grahame Roberts here in Toronto, and the theme that Grahame wanted me to bring up is about recession. So this question actually goes for Alex first. Alex, you focus on Canada. With recession on everyone's mind how are you positioning the fund for 2023?
Alex: Well, thanks for inviting me to be on the panel, Wan. Grahame, thanks for the question. So, you know, recessions don't have to equate, in my opinion, to financial ruin. Unfortunately, this is when we see individual investors making really poor emotional type decisions. Bad news when you see bad news dominating the headlines.
The short term satisfying decision is to sell with the intent of buying back in. But I can promise you one thing almost nobody gets back in on time. And the reason you feel like selling is because you've already experienced some of those negative days in the markets and as we all know, we're missing a handful of the best days over long periods of time can drastically reduce the average annual return an investor could gain just by holding on to their equity investments during those sell offs.
And I get it, you can take a look at the opposite side of the pendulum. And missing the worst days can potentially offer higher returns than a buy and hold strategy. But disentangling the best and the worst days can be extremely difficult since, you know, historically they’ve often occurred in a very tight timeframe, sometimes even on two consecutive trading days.
And I would strongly caution you or advisors from using this type of a strategy. So then if timing the market by heading to cash is not a recommended strategy, what are the other options out there? And I think this is where dividends come to the rescue. And as we all know, dividends reduce volatility. They help protect the downside. They help you recoup during tough periods in the market more quickly, recoup your losses, that is. And they can provide a large portion of a given year total return. And of course, they often provide better risk adjusted rates of return.
Now, let me show you a graph of dividends contribution to total return by decade if the operator can please put up slide number nine. Thanks, operator. Note that this is U.S. data, but the point I want to make here is that depending on the decade, dividends can be a meaningful part of your total return and on average, dividends make up, as you can see in in the far right column, up to 40% or 40% of the S&P 500 return. Now, during inflationary decades like we had in the sixties, in the seventies and the eighties, they made up on average almost half of your returns.
Now, this is obviously a big advantage over a non dividend focused portfolio. And I would also have you take a look at the periods 1940s and 1960s and the 1970s. Those were decades where the return was lower than 10% and dividends in those periods were major contributor to your total return. And if you think about the decade, the 2000s, dividends were the only source of income that one would have generated.
And so, you know, for me, I think it's fair to say that in those decades where the total return was substantial, for example, greater than 10%, like the fifties and the eighties and the nineties that you see on this chart, dividends played a smaller role, granted, but you know, getting a three, four or 5% extra dividend yield is better than getting nothing in my opinion.
And then also remember that if you think about the Nasdaq index, it didn't gain a single point for the first 15 years of this century, not a single point. And that's obviously very tough on a retirement plan. So, okay, now what we what we've done so far is we've taken a look at all the dividend payers and thrown them in the same bucket.
But what I'd like to do now is peel back the onion a little bit and think of different categories of dividend payers, those that pay materially higher dividends as opposed to the broad cross-section of companies to pay a dividend. So operator, you can put up slide number ten for me, please. Thanks. So here what we're showing is the dividend universe in the S&P 500 broken up by what we call yielding quintile.
And so the highest dividend yielding equities are the top 20%. That would be quintile number one that you see on this chart. And the second 20% in terms of dividend yield is quintile number two and so on. So there's roughly 90 years of data between the years 1930 and 2019 that's encapsulated in this chart and the top quintile, you can see outperform the S&P 500 67% of the time and the second quintile outperformed 78% at the time.
And it's interesting that the second quintile outperformed more than the top quintile. And there's reasons for that that we can get into. If you want to follow up with your NCM wholesaler, I'm happy to explain that. But even the middle quintile outperformed 67% of the time. So the point that I think you should take away is not only do those high dividend payers make up a big percentage of the stock market's total return, especially in those lower decades that we showed on the previous chart, but they also perform more often than low dividend payers or non dividend payers, and they even outperform the broader S&P 500 index.
So I think it's important to make that distinction. Okay. I have one more chart I want to share with you. It shows why investing in dividends over the long term can be a beautiful thing and operator, if you can just put up chart number 11, please. Here what we're showing is the proportion of the S&P 500 total returns that are due to price only and due to dividends over different moving average time periods.
And you can see the longer you stay invested in the market, the greater the importance of allocating a portion of your portfolio to dividend payers. And besides the performance bumps that they provide, why why is that important? And I think it's important because stock prices, they tend to bump around, they tend to move up and down based on sentiment and the whims of the market, where dividends tend to be very consistent and stable.
And I think that's an important distinction. And so dividends are obviously how you feed your expenses during retirement. And so you need something consistent and stable. And as per your question, Grahame dividends, I think, are how you fight recessions. And then so just very quickly to finish off, I just wanted to talk about just a couple of our products.
So the Income Growth Fund is a dividend focused small-midcap fund. It pays out a meaningful distribution. The fund of the yield is 4.4%. It has a dividend growth rate many times that of inflation, and it's supported by a strong free cash flow yield of 13%. Even our Small Companies Fund, 80% of the names in there pay a dividend and the dividend growth rate is 15%.
Now, Jason's Global Income Growth Fund has a 13% five year dividend growth number. Very impressive, a 22% return on invested capital and the payout ratio is about 41% in his fund. So very impressive metrics. And then with Mike's Dividend Champions fund, metrics are also impressive. The dividend the free cash flow yield is seven and a half percent or 7.4%, and return on equity of 22%. And again, the all important dividend growth rate is in this case, it's a five year dividend growth rate of 17%. So very impressive metrics amongst these products.
Wan: Thank you, Alex. The next question actually still stays on the theme of recession. And this is still a continuation of Grahame's questions from his feedback with advisors. On recession, it's going to Mike Simpson. So Mike, from a North American perspective, how are you positioning NCM Dividend Champions as it relates to recession in 2023?
Michael: You always look for companies that can survive. Companies that are companies for all seasons, companies. There's no such thing I've encountered in my career as a recession proof business. However, we look for recession resistant or recession resiliency. When I look to Canada, there's two rail companies that are in a duopoly. The rails, all my career, have had pricing power. CP Rail, which I like the most of the rails, 40% of their business is bulks. So you consider grain, potash, canola, they'll move it to the ports. We still have growing populations in North America in the world, so their service is essential. They're waiting a long time, but very soon they're going to get approval to go ahead with their merger with Kansas City Southern.
So I like that a lot. Not just because of the unique circumstances with the merger. CP will probably increase their dividend in 2024. Just moving quickly to other sectors, industries, insurance. Right now, conditions in insurance are very hard, so they have the ability to raise price, which gives them the ability to be more profitable, raise dividends.
Garbage, I like the garbage business because it's it's essential. It's a key part of infrastructure. And these companies have the ability to raise price in some cases greater than CPI. I like that and other other companies that are resistant throughout the time, REITs, industrial REITs, there's a shortage of industrial land in cities. Even with a business slowdown, we're still buying more with e commerce. So they serve an essential role and it costs a lot to develop land to put up a new building. These these REITs real estate has value and it's proven to do well during periods, bouts of inflation.
Wan: All right. Well, thank you, Mike. The next question actually comes from another Mike. This is our Mike Miller, who supports advisors in the GTA with a focus on Burlington, Hamilton, Ancaster and now Kitchener, Waterloo, London. Mike and his clients are really focused about inflation. And this goes back to you, Jason, is the first question. Jay, you manage a global equity balanced fund. What are your thoughts on inflation and what are you doing to position the fund?
Jason: Well, like I mentioned in the last part or the first part of my presentation here, I think inflation's peaked, but it definitely hasn't gone away. And put your hand up if you don't think there's any inflation out there, there's clearly, clearly inflation. The one nice thing and I know we've spent a lot of time harping on dividends and dividend payers, but the nice thing about it is that those types of strategies tend to tick all of the boxes when it comes to inflation, regardless of what your call is on interest rates or what the Fed should or ought to do and all that sort of stuff, what you want to do is you want to put in your portfolio assets that are positively correlated with inflation. Generally that means, you know, for the most part equities. But over the short term it could be back and forth.
But what we found, you know, I've go to chart 14. What this shows is this shows beta. These are various classical inflation hedges and or various assets around that clients can participate in. What you just want to do is you want to be on the right side of the boat when, when, when, when the currents moving one way or another. And so you look at gold, you look at commodities. Yes, everybody hears about that and goes, yeah, I want to be in that because I'm worried about inflation. But Alex is spending a lot of time talking about second quartile dividend payers, and it's the one equity component that over a long and consistent period of time actually has a positive direction with inflation.
And that has a lot to do with the free cash flow that those companies generally do. And the fact that most of those dividend payers in the second quartile are actually companies that are growing their dividend. So now as we go through that list, you know, I kind of want to do an end around and for anybody watching goes, well, why don't I just put all my money in in gold and commodities?
Well, if we flip to slide 16, when we actually start to consider doing that and taking into consideration the risk and the volatility, all of a sudden commodities and gold drastically fall off the table as an appropriate allocation for your portfolio. I am not going to sit here. I'm a big, big institutional investor guy and I believe diversification is the key to hitting your goal.
So there is a place in people's portfolios for commodities and gold, but solely commodities and gold, you're introducing a massive level of risk. But look what happens at the top of that second quartile dividend payers again. Now this number, 0.83, is basically the per unit of risk or per unit of return that you take on for risk. When you consider the risk that you take on to go in dividend payers that are growing their dividend and the return that you're getting, there have been five or six slides that we keep hammering home in this presentation that just suggests that we're ticking all the boxes and that's where we're going to be.
So back to the original question. When you want to protect against inflation, not only do you want to be in equities in some of your traditional hedges, but the best equities to be in and the best pool to swim in are those companies that kick out dividends that have the capacity to grow. Everything that Mike was talking about, about moats and long term tails, are long term trends with revenue streams and and all of that stuff bleeds in.
And we go into companies that have free cash flow and that bleeds into the dividends. That's the best way single best way to combat inflation is not only be in equities, but equities that pay out a consistent and growing dividend stream.
Wan: Thank you, Jason. This is the same thought to Alex from Mike Miller's clients in his territory. Alex is managing a Canadian equity balanced fund. What are your thoughts on inflation and how are you positioned income growth?
Alex: Yeah, thanks. Thanks for the question, Mike. This may sound like a bit of a dividend overdose here, but it's important to keep reiterating the importance of dividends in a client’s portfolio because, you know, like high inflation, in my opinion, is a financial plan’s worst nightmare.
And here's my thinking recessions tend to be relatively short, but they always give birth to the next bull market, where the market compensates you for riding out those bear market, that bear market and inflation, on the other hand, it just perpetually eats away at your purchasing power. And that purchasing power is eventually going to come from your retirement nest egg. Yeah, and it comes from the whole retirement nest egg, the whole portfolio, not just certain segments of the portfolio.
Now, getting back to inflation, I think of inflation as core inflation and it's broken up into two components. There's the goods inflation and then there's the services inflation. You may be aware that inflation has been coming down recently and this has been supported by goods inflation that's been coming down. So many companies like Walmart and Home Depot and others have had way too much inventory in their warehouses, which means goods inflation should continue coming down. And that's what we've been seeing now on the services side. So services, inflation, we see it as being more stubbornly high. But the good news here is that some of those sticky components that have caused it to lag goods inflation, we expect those to continue to roll over as time moves and we move through 2023 and that will help further bring down core inflation in the coming months.
And that's good news. And it's one of the reasons that we've seen the markets perform better recently. But and there's always a but nobody knows where inflation is going to level off. It is going to level off at 4% at 3% or the central bank's long term goal of 2%. And whatever level you think inflation is going to settle out at, that that means that that retirement nest egg is worth that much less in terms of purchasing power.
And so how do you fight this as an investor? And as an investor you may also wonder, does a defensive portfolio heavily weighted towards fixed income protect you? And the problem with fixed income is that the income is just that it's fixed. And that means that the interest you get from a bond, a note, GIC will lose purchasing power over time, and that reduction in purchasing power is amplified during higher inflationary periods.
When you're one of your five year GIC or year one of your ten year Government of Canada bond, you're not going to lose a lot of purchasing power on that coupon you get from that bond. But come year five of that GIC or year ten of that GIC, that same coupon is not going to buy the same amount of goods that it did in year one.
On the other hand, a good quality business, a good quality business that grows its dividends will preserve your purchasing power and often even increase it even after inflation. And so. Operator If you can, please put up chart number 15 for me. Thanks. As is visible, once again, dividends come to the rescue and you can see the purchasing power of growing dividends and their ability to outpace inflation over long periods of time.
Now, I'm often asked about those other asset classes that Jason talked about, and let's call them the classic inflation hedges that are well known to the market and to investors, for example, commodities and gold stocks and as you know, they've long been known as being able to help fight inflation. And if you can put Chart 16 back up and I think it's worthy of putting this chart back up. And you can see, as Jason said, that the top two quintiles of high dividend payers outperform on a risk adjusted basis and they outperform both gold and commodities over long periods of time.
Now, for some reason that I don't quite understand dividends don't have the same inflation fighting reputation as gold or commodities. And this may be true for short periods of time, compressed periods of time. But if you're thinking longer term or if you're thinking, as I do, that gold and commodities are very difficult and very risky to buy at the right time and to sell at the right time, then in my opinion, dividends should be a preferred strategy, should be your preferred strategy to fighting inflation.
And speaking of performance, operator, if you can put up Slide 17, please. Okay. So let me take a moment to explain this slide. What we're showing you is the growth of a $100 differentiated by dividend strategy. And this is important because the top line, I think, really does a good job of highlighting NCM’s dividend investment methodology. Now, the top two lines are the returns of the dividend growers and initiators and dividend payers over time.
And what I wanted to highlight was the difference in performance between this group and the dividend cutters and eliminators and the dividend non payers that you see near the bottom of the right hand side of this chart. This is not a small difference in performance and the difference in performance in my opinion, more than makes up for the negative effects of inflation and has written out all of those nasty recessions and those terrible bear markets that we've all experienced.
Now I'm going to share a quote from Albert Einstein in which he referenced the eighth wonder of the world. And some of you may be familiar where I'm going with this and operators you can please put up Slide 19. So that eighth wonder of the world, according to Albert himself. This is a quote from him is the power of compounding over long periods of time.
And here what we're showing you is the S&P 500 by price only versus the S&P 500 returns, which means that the total return, which means the price return and dividends. And then what we're doing in this chart is we're taking those dividends and we're reinvesting them back into the market. And to say the difference in return is material is an understatement in my opinion.
And Operator I'll just finish up with chart 18, please. Thank you. So a strong free cash flow company can simply leave the surplus cash on the balance sheet. But a business seeking only to compound its cash on the balance sheet is likely to see its long term growth prospects compromised because they're not investing back into the business and making their commodity, their product more competitive. And shareholders don't invest in companies just to be a deposit account over the long term.
They want their company to reinvest for growth and to pay out the cash and earnings that that company's generating to the rightful owners, which are the shareholders in the form of dividends. So bottom line for me is I believe that we're going to go into a period of dividend outperformance. And if you think of the past decade, most investors focused on those high multiple tech stocks, many of which earned no money and generated no cash flow.
Today, I believe investors will focus and make companies focus on dividends and dividend growth. And so the long term average dividend payout ratio for the S&P 500 is 57%. And payout ratios are important because they show what percentage of a company's earnings are used to finance that dividend. At the end of 2021, this number dropped to 32%, meaning that companies have a lot more room to increase the size of their dividend.
Plus, as you can see from this chart, there's a heck of a lot of cash on corporate balance sheets, further showing that many of the boards and management teams can afford to show consistent dividend growth, which is going to be so important for the market and so important for retirees.
Wan: Okay. Thank you, Alex. I've got another question. We talked about recession, we talked about volatility, we talked about inflation. This question is actually coming from Corey Longo, who works alongside Joe. And this is for all three of you. It's actually a really good question, and it's consistent with some of the questions I'm seeing in the Q&A portion. This question is for all three of you.
What would be your pleasant surprise? So pleasant surprise in the market that would make you really happy as a fund manager in 2023? I'll let Jason lead that off with what would be your happy make you smile. Didn't see that one coming, but you're very happy with pleasant surprise for you as a global manager.
Jason: Riders win the Grey Cup. I don't know if that's the other thing would be spring comes before the end of March. I would really love to be able to get out my motorcycles.
In all seriousness, though, Europe escapes a recession that would be really, really, really, really good for the portfolio. You know, we got the war in Ukraine and what Russia's doing there is a tragedy and it seems like it's been a milder winter than than people were expecting. If Europe can actually escape the recession that would be awesome. It looks like it is crossing my fingers. Markets are breaking out there. Consumer discretionary is doing well. I would be very, very, very happy with that. And if markets just returned to a normal type scenario, I would it would be nice to be like just normal. Normal. Good.
Wan: Thanks, Jay. Okay. Mike, what would be your pleasant surprise going into ‘23?
Michael: I would say if we end the year with headline inflation CPI at two and a half percent, I'd be pleasantly surprised as we discussed, and I'm not going to contradict any of my colleagues. Inflation is clearly coming down, but it's just the rate of it that it's coming down.
I hope there isn't another just call it, another energy mini shock. But if things progressed the way they are, if there is weakness in the economy, that brings inflation down to two and a half percent, I think that would be very good. But the key lesson from this seminar tutorial is we have portfolios that can withstand any environment, but getting inflation down with a two handle would be a definite bonus at the end of the year.
Jason: Wan, can I just jump in there? Mike has a really, really, really, really good point there. I've been sitting on Bloomberg and a couple of the other talking heads everybody's now concerned about. You know, the Fed's got it, but they're worried about inflation flaring back up again. That is a serious concern. I think it's massively undervalued. Everybody thinks we're just we're done.
Just because it's coming down doesn't mean it's gone away. That's a great point. By Mike.
Wan: Alex, any any thoughts on a pleasant surprise for you?
Alex: You know, I would reiterate what, what might said too, there's always the risk of that and we saw that in the sixties and that's the, the seventies were such a difficult decade because the Fed kept, the Fed kept lowering interest rates as soon as they felt that they had inflation tamed or going in the right direction. And then they they, you know, created too much liquidity too quickly. And I think Powell has learned those lessons. But but certainly that's a risk.
For me, it's no, let's just get rid of the fad stocks and the bubble stocks. Let's get those out of the markets. And the reason is, is I just see so many investors fall in love with them. They get in. And I would argue that investors experience in these fad stocks are almost always very difficult financially for them. So to the extent we can take out and I won't mention them, but I think we all know what they are, these bubble stocks and these fad stocks that just get out of control and have a life of their own and then they crash very quickly. If we can just eliminate those and have investors focus in on singles and doubles and dividends that would be that would be ideal for me.
Wan: Beautiful. Thank you. Okay, we've got time for just a few more questions. This question actually is just for Mike Simpson. It's coming from Marco Mannella, who's one of our new wholesalers covering the GTA. Marco's been speaking with a whole bunch of his clients. And the question, Mike, is really this Mike, your fund is called Dividend Champions. Last year was a really tough year in the overall markets. Your fund finished positive in both sales and return. What were some key takeaways from last year that you could apply into 23?
Michael: Yeah, great question. Some key takeaways is, is energy is not dead. Energy will go through some cycles, but we are going through a transition to a lower carbon world. However, we have fuels such as natural gas, which will help us pave the way to a to a cleaner, greener future. It's the resiliency of Dividend Champions, their ability to raise dividends any cycle, looking for companies that can raise their dividend in any environment.
So that's some of the key takeaways and how the portfolio is focused a north or north south Pole and you buy companies in the portfolio that aren't there in Canada. Whether that's mature high technology in the U.S., you know, consumer brands, there's some in Canada, a lot more in the U.S. Same with the drug and pharma. So it's just using that knowing knowing your valuation and being prepared to step in when when stocks go on sale.
Wan: Okay. Thank you, Mike. The next question is actually coming from Daniel MacFarland. He's one of our new wholesalers as well. It's for Jason. Jason, you described your approach as a global manager as aggressive, aggressive in asset allocation, but conservative in company selection. Can you explain this a bit further?
Jason: I yeah, Alex went through and did yeoman's work explaining why the answer to be invested is it's always to be invested. Like, you know, if you truly have a three or five year time horizon, don't worry about the nuances next month, this month. The portfolio definitely has a lean in a favor towards equities because over the long term, that is the place where you go for your growth, your dividend growth. And this to be consistent with what the seminar is all about, but that's where you always want to be, you know, predicting like I don't position the portfolio for what it's going to do by the end of February, the end of March, I'm worried like 12 months, 18 months from now.
And equities is always always the place to be so very aggressive from an asset mix perspective. But depending on the cycle you're in, you know, many of you on the call have been in a couple of presentations for me, and I'm not enamored with the concept of beta, but I do use it because it does kind of crystallize what I'm trying to get at depending on the cycle of the economy, you want to be high beta, low beta, and right now I'm running a low beta portfolio on the equity side, which is consistent with the dividend strategy and stuff like that.
But because, you know, we're at a 50/50 coin tops, what can absolutely happen over the next 60 days, who knows? Like it's trying to tell, you know, I could tell you it's generally going to be nice in June, but I don't know what day it's going to rain on. And that's basically what we've got going on in the market right now.
So I've got you know, I don't have those high flier names. I've got, you know, a weight towards staples, a weight towards health care. So very, very conservative on the individual securities selection. So you got to have revenue growth. You want your earnings to grow faster than your your revenue. You need to have free cash flow growth. You need to have a dividend growth stream.
And that's what it is. So it's aggressive on the asset mix stance, but very conservative in your typical investment philosophies that you'd get profitability and ROE and revenue growth for the types of stocks that you're going in.
Wan: Thank you, Jason. So I'll question for me coming from the audiences as they're asking about the charts and some information. So we're happy to share the charts. It's going to cost you an email. You have to email your wholesalers or email@example.com and we will be happy to follow up. But yes, we will definitely make sure the charts are available. But I'm serious. It will cost you email. The last question, though, comes from me and I get to ask it. Alex.
Alex, We've been talking about dividends as dividend season. You guys have highlighted some really strong dividend companies. We sell mutual funds. I think mutual funds are really important. The last 30 years have seen a whole bunch of change in the industry. I have a I have something to show the audience this is my Canadian Securities book circa 1990 in mint condition. Awkward. There's two pages in here on mutual funds. In 1993, when I took the securities course. There's a lot more now. Why should mutual funds be the tool to buy dividend paying stocks? And what do you think the next 30 years will look like? And I suspect the book will be bigger.
Alex: Wan, it doesn't look like that book's ever been opened. Jason, Mike and I, when we when we had our books, there was like sticky notes all over, pages were ripped. It looked like it went through war. So it's a it's a good question for sure. To me there's a lot of advantages owning dividends in a mutual fund or even a dividend focused mutual fund.
You know, let's just start with the regulatory perspective. Mutual funds are overseen by the securities regulators. Number of checks and balances are significant, and I think they should give some confidence to investors. You know, there are funds that are in a corporate class. Take, for example, Income Growth and Global Income Growth are are in the corporate class.
And the advantage of that is we can use the expenses of the corporation to offset some of the interest income in those funds. There are those funds are taxed advantage. And in the case of Income Growth, it's 100% Canadian. The equity, 100% Canadian eligible dividends, again, it's tax advantaged. So, you know, the second thing I would I would suggest is that and Jason highlighted this is the diversification advantages are hard to replicate in an individual's portfolio.
Remember, these portfolios are diversified by industry, geography, currency, asset class. They're you know, they offer professional management and convenience in a one ticket solution. There's a lot of strong advantages. Plus, if you remember the magic of compounding chart that I put up earlier, dividends are professionally reinvested on your behalf in a mutual fund, unless, of course, you decide to have those dividends paid out.
But our experience here at NCM is the vast majority of investors have those dividends reinvested on their behalf. Now, individual stocks are, you know, they often pay you in cash. So mutual funds in a way, embed a degree of financial discipline into your portfolio as well. Now, if I can, I'm just going to take your question one step further and offer a few suggestions or let's call them checkboxes that advisors should consider when purchasing an investment product, whether it's ours or even a competitor of ours.
You know, these boxes, you know, include the tenure and track record of a manager, because that's the only way then that you can show that a manager has a skill and that's to study their track records. So that would be one of the checkboxes. The second one would be active share and active share measures how different or similar does a mutual fund look to its its index or its benchmark?
And, you know, if it looks similar to the index, which unfortunately many mutual funds do, then it's unlikely that they're going to outperform. It looks exactly like the index, then it's going to underperform. Like many ETFs look exactly like their index. So they're engineered to underperform by the amount of the fees. That's not what we're in business to do. We're in business to provide a value add for clients.
And the third checkbox is to make sure that the manager has skin in the game. And there's lots of good data to show that managers that invest in their products outperform. And I can confirm that Jason, Mike and I all have investments in in the products that we managed.
And then finally, the last checkboxes we describe in this webcast, you know, high yielding growth dividend stocks tend to outperform over the long term. And so then if you check these four boxes, what you're doing is you're just mathematically increasing the probability of having a positive experience over the long run. And I'll finish it, I'll finish it there.
Wan: It couldn't have been said better. Thank you, Alex. Thank you, Jason. Thank you, Mike. Thank you to the NCM sales team that's collected some really good questions for our fund managers. Thank you to the participants watching. We will make the charts available. But you will you will. It will cost you the email. We do want to hear from you. Send us a note. I did see there were some questions that came in. One was, did I pass the securities course.
Jason: I was going to say, you're getting you're getting a lot of flak for that in the question and answer.
Wan: And the other one, I did not buy this on eBay. This is actually mine. That seems to be getting the most engagement.
But we will make this recording available as well. On behalf of everyone at NCM, it's Dividend Season. We've got some great tools on our website. If you want more, please register to subscribe to our expert insights. We have some great commentary and information from our fund managers all on our website, NCMInvestments.com. Thank you all very much. Have a great Dividend Season.
The information in this video is current as of February 1, 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 involved inherent risk and uncertainties, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. All opinions in forward-looking statements are subject to change without notice and are provided in good faith. 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. Jason Isaac is a Portfolio Manager, with Cumberland Investment Counsel Inc.(CIC). CIC is the sub-advisor to its affiliate, NCM Asset Management Ltd.
Income Solutions Team
Managing a range of income portfolios that can generate fixed monthly distributions without depleting your capital.