David Sykes, manager of the $135-million TD North American Dividend, thinks that the growing strength of corporate America has been overlooked by investors.
"It's very ironic," says Sykes, a vice-president and director at TD Asset Management Inc. "When a lot of investors in Canada got frustrated with the U.S. , "it was a time when companies were flush with cash and were continuing to reward shareholders with consistent dividend increases. Over the last couple of years, I think the U.S. market has done much better than the Canadian market."
Reflecting his bullishness on the prospects for our southern neighbour, TD North American Dividend has a 75% weighting in the U.S. Despite the difficulties facing the U.S. government and consumers, "I think people have overlooked the fact that corporate America has never been in better shape," says Sykes. "Their operating margins are very close to all-time highs, and cash on the balance sheet is at all-time highs."
Sykes has led the North American Dividend mandate since January 2010, and TD U.S. Monthly Income since its inception in August 2011. He also co-manages TD Global Dividend. In the North American mandate, Sykes aims to find the "absolute best companies that are in Canada or the U.S," while being mindful of their valuations. "Most importantly, do they have a sustainable competitive advantage and solid balance sheets so they can withstand a hiccup in the economy?"
Investing in shares whose dividend yields are 2.5% or more, Sykes favours companies that he believes have the ability to increase their free cash flow and dividend payouts "year in and year out." He says he would rather have an overall yield of 3.5% that is growing every year, versus having a portfolio with maybe a 6% yield with no growth.
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Very quickly over time, he adds, inflation will erode real returns if there is no dividend growth. For him, it's always a "balancing act" between something that pays you today and that can pay more in the future.
Currently, the 50 to 65 holdings in TD North American Dividend are predominantly large-cap companies, all of which have track records of dividend growth.
A representative holding is the global beverage giant Coca-Cola Co. KO. "They've got an amazing product, an amazing brand, and an amazing distribution network in 200 countries around the world," says Sykes.
Along with consistently growing free cash flow and demonstrating its willingness to evolve to meet changing consumer preferences, Sykes says Coca-Cola has raised its dividend every year for the last 50 years. Moreover, in the last 25 years, the annual rate of dividend growth has been 11%, he adds.
Broadly diversified across sectors, TD North American Dividend's roughly 17% position in financial-services stocks is held mostly in Canadian banks, which are proven "dividend growers." According to Sykes, it also makes a lot of sense to look at Canadian energy, pipeline, utilities and telecommunications companies. "But outside of that, I would much prefer to go to the U.S. for exposure in health care, information technology, or consumer discretionary."
Sykes's annual portfolio turnover tends to be very low, averaging 10-15% . If a company continues to meet his criteria, he says, it will remain in the portfolio for five or 10 years.
Sykes draws on 15 years of industry experience and an extensive academic background. He received a bachelor of commerce degree (major in economics), along with a bachelor of arts (major in political science), from Saint Mary's University in Halifax in 1994.
After graduation, Sykes went to England and earned a master's degree in politics, philosophy and economics from Oxford University in 1996. He then went to the London School of Economics and earned a master's degree in international relations in 1997. Later that year, he moved back to Canada and joined TD Asset Management as an analyst. He received his CFA designation in 2003.
During his career at TDAM, Sykes's responsibilities have included sector coverage of U.S. health care, consumer staples and consumer discretionary, and U.S. financial services. Today, his job is more focused on the overall portfolio and the impact of macroeconomic trends.
In managing TD North American Dividend, Sykes takes what could be described as a blended approach to securities selection. His discipline does not have a growth bias by any stretch, "but it certainly doesn't have a value style either."
For Sykes, cheapest is not necessarily best. He's willing to pay a little bit more for high-quality businesses that meet his criteria, and these days he finds there are plenty to choose from.
