With inflation coming back and a rising rate environment expected by many to become the new norm, investors have some decisions to make. Should they stick with their long-term strategies or is now a good time to change tack?
In the current investment environment, Terry Thib, a portfolio manager at iA Clarington, believes that investors should be positioning out of some of the traditional bond proxy type sectors, like pipelines, telecoms, utilities and REITs. “It’s not to say you’re going to get negative returns from those areas, you’re just not going to outperform,” Thib says. “You would want to be more oriented towards financials, insurance companies, some consumer discretionary, technology, industrials and more cyclical related sectors – those are the ones that will benefit from this global reflation theme.”
Thib describes his investment process as being “quantitatively and fundamentally based” and is always seeking out companies that display the ability to generate decent cash on cash returns. He wants to see that a company is able to take free cash flow and reinvest it into the business in order to grow earnings and increase their dividends. “As a dividend investor in a rising rate environment, you want to make sure that companies can grow their dividend at a rate equal to or greater than the change in the ten year,” he says. “A lot of these dividend stocks are valued off of a spread of the ten year yield and if you’re getting spread compression that’s negative for share price; spread expansion is positive.”
In the current landscape, Thib urges investors to utilize a dividend growth strategy that focuses on solid free cash flow growth and yield, dividend growth and earnings growth – it’s what he calls the “magic combination”.
During a sustained period of limited growth globally, growth stocks have outperformed and Thib has noticed a real multiple being attached to any stock with a semblance of organic growth. But with growth now starting to show itself in the global system, value oriented stocks have started to catch a bid over the past four months. “If the earnings and global growth picture continues, you’re going to see value outperforming growth for the first time in a long time,” Thib says. “I’m making a pitch here for a quality oriented dividend growth strategy with a value bent on the valuation side - that’s the positioning of the funds that I run.”
“I run the growth and income fund and in that we try to avoid the traditional bond proxies altogether. We are adopting a quality dividend growth strategy; looking for companies that are growing their dividend and earnings.”
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