Ruth Saldanha: Dividends are always popular among Canadian investors. So, today, we decided to talk about them. Sri Iyer, Head of Systematic Strategies at Guardian Capital also sub-advises the Horizons Active Global Dividend ETF and the Horizons Active Canadian Dividend ETF. He's here today to discuss what we can expect from Canadian dividends in 2020.
Sri, thank you so much for being here today.
Srikanth Iyer: How are you, Ruth? Thanks for inviting me.
Saldanha: First up, with all this talk about slowdown and recession, should investors be worried about dividends, especially in the context of high valuations?
Iyer: Quite the contrary, the next decade will be the decade of dividend growth investing. Given where equity valuations are where the U.S. stock market is trading at 18, 19 times multiple, where real bond yields are at negative 40 bps and we're seeing a pretty good overvaluation cycle happen in the market today, we think volatility ensues. Staying vested in the stock market and collecting a rent through dividend growth will be one of the premier ways of investing for the long term in the stock market.
Saldanha: For Canadian investors in particular, where will dividend growth come from?
Iyer: So, dividend growth in Canada doesn't come from the typical oil and banks anymore. The success we have had in managing the active Canadian dividend strategy through Horizons come from us unweighting oil and banks, because Canada is generally undervalued in all the other sectors. Where we see the biggest growth in dividends come from are sectors like Canadian technology companies, Canadian infrastructure and industrials and also, to some degree, Canadian consumer discretionary stocks. So, if you can start focusing on these sectors, including infrastructure, real estate and other areas, and start looking less at banks and oil as the only source of dividend and dividend growth, there's significant opportunity in Canada still left.
Saldanha: In 2019, we saw some major dividend cuts. Do you see any risk of that happening in 2020? And if so, where do you see some of these risks?
Iyer: I think the biggest source of dividend cuts in Canada, specifically, I would say, would come from the oil and commodity patch. And the reason for that is not just because oil is weak right now, because we saw asset price deflation in oil but also oil demand is considerably weak right now. So, the balance sheets of oil companies have not been able to replenish themselves at even $45, $50 oil, let alone where oil prices are going right now. On top of that, if you have certain basic thematic assumptions of peak oil in six or seven years, with driverless cars and everything else, you're seeing the mantle of sustainable cash flow for energy being moved away from energy to utility companies. So, the utility companies will be the new gas stations of the future. So, the usage of energy, which is benchmarking yield, might be far more susceptible to dividend cuts than one is expecting right now. So, I wouldn't use a valuation measure or something to invest in dividend stocks. I would truly look at the long-term cash flow, the visibility of cash flow growth for oil companies, and see if there is enough duration, equity duration, risk you can take to stay vested in long term in oil companies. That is becoming increasingly difficult as we are noticing.
Saldanha: Finally, to end with, what are some of your top picks for the dividend space in 2020?
Iyer: So, in a global context, in dividend space, there are two very important things you need to consider when you do dividend investing – duration and credit. Equity duration defines how long will it take to get all the cash flow for company over its longest cycle. The United States is right now by far the best place to get a long duration equity investing through dividend growth sectors like technology, industrials, consumer discretionary, and to some degree, consumer staples are some very strong areas that I would look for in the United States to not go for high dividend yield, but go for high dividend growth. When it comes to pharmaceuticals, insurance companies, defense contractors, and high-yielding consumer staples, I would look to Europe, which can give me anywhere from 3% to 5% yield with a very low chance of a dividend cut, which is more a credit response. So, if you're going for the credit side of dividend, which is high income, Europe is the best place to be. If you're going for long duration and strong cash flow growth visibility for dividend growth, I would say United States and the sectors I mentioned are some of the best places to be in today.
Saldanha: Thank you so much for joining us today, Sri.
Iyer: It's a pleasure. Thanks for inviting me.
Saldanha: For Morningstar, I'm Ruth Saldanha.
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