Worried about high inflation and a weak economy? Brompton's ETFs focus on dividends to protect wealth and provide stable returns
This article was produced in partnership with Brompton Funds.
It’s been a long winter for Canadian investors. With inflation near the highest level in 40 years and a recession looming on the horizon, they’re seeking solutions that will safeguard their portfolio while offering the prospect of consistent returns. A dividend growth portfolio may provide these benefits and more, according to one leading analyst.
“In an environment of slower economic growth and sticky inflation, it makes sense to buy companies that have confidence in their future,” says Laura Lau, chief investment officer at Brompton Funds. “How do they demonstrate that confidence? They pay a dividend, and they increase that dividend.”
Speaking to Wealth Professional, Lau said the supply chain disruptions and rising prices that affected the economy last year will persist in 2023. Against this backdrop of continued uncertainty, investors need to identify those businesses that are strong enough to ride out the storm. Brompton seeks to do this through its Brompton Global Dividend Growth ETF (BDIV) and Brompton European Dividend Growth ETF (EDGF).
“A company that increases dividends tends to be a company with a solid business model, pricing power, and strong cash flow,” Lau said. “And if they have money to pay a dividend, they have money to invest in their business, pay for talent, invest in technology, and increase efficiency.”
A dividend growth stock sends investors a message about quality. These are companies that usually have a competitive advantage in their industry that may help them ride out a weak economy while their rivals struggle and even fail.
Back to basics with energy and food
Lau said some industries are providing better investment opportunities than others during the economic downturn.
“The biggest dividend growers last year were energy companies,” Lau says. “With rising demand for oil and China reopening, they're a cheap, natural inflation hedge. So, we like those companies.”
The alternative energy sector is also interesting, Lau said, as spending for electric vehicles and renewables show no sign of slowing down.
“This is a ‘pick and shovel’ play,” Lau says, referring to the investment in tools that provided the foundation for the Gold Rush in the 1800s. “You buy companies that help build a new industry. These could be the electrical companies such as Schneider that helps other companies with the energy transition.”
As another example of an investment that can provide stable growth in an uncertain economy, Lau cited packaged food companies. A trip to the supermarket shows that food producers have had little trouble passing higher costs on to consumers.
“And now, even though a lot of their costs are actually starting to come down, they're still increasing prices,” noted Lau. “So there is a lag and investors can capture that.”
Dividend growth stocks offer other advantages for investors. The steady stream of income from dividends can increase over time as higher corporate earnings trigger higher dividends, helping investors outpace both inflation and the fixed returns on other investments.
There’s also the potential for capital appreciation, as stronger earnings and dividends usually go hand in hand with a rising share prices. Lau said the prospect of a rebounding stock market is something investors will want to watch closely.
“Bull markets are born from horrible bear markets, and we had a horrible year last year,” Lau says. ‘When is the bull market going to start? I don't know, but you want to have money in the game.”
It’s an uncertain time for investors. With a weak economy continuing into 2023, they need to shield their investments from inflation while identifying the opportunities that can still provide good returns.
Dividend growth stocks may be an attractive solution. They provide a stable source of income in a stagnant economy and offer the potential for significant upside when the stock market recovers.
This document is for information purposes only and does not constitute an offer to sell or a solicitation to buy the securities referred to herein. The opinions contained in this report are solely those of Brompton Funds Limited (“BFL”) and are subject to change without notice. BFL makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, BFL assumes no responsibility for any losses or damages, whether direct or indirect which arise from the use of this information. BFL is under no obligation to update the information contained herein. The information should not be regarded as a substitute for the exercise of your own judgment. Please read the relevant prospectus before investing.