Good afternoon,

 

The subject line of my last client email was something to the effect of “grinding higher”, referencing a slow climb in client portfolios for the first six months of the year. We are now nearly nine months through 2023 and portfolios continue to do this dance between positive and negative returns, precisely in line with the current sentiment of the day as it relates to inflation and interest rates. We will have updated portfolio data on our website for the 3rd quarter sometime in October but as a preview, all 3 managed portfolios are positive for the year, albeit marginally, and generally in line with their benchmarks, depending on the day. I’ve had an uptick in client calls/emails lately, which is why the note. Statements for August were down from July, and I suspect most of you are becoming annoyed with the up/down in your portfolios, as I know I am. I will do my best to offer some clarity if that’s possible. 

 

I have written ad nauseam about the effects of higher-than-normal inflation and the resulting interest rate hikes. The data on inflation in the western world is trending downward but not as fast as central banks would like. Thus, interest rates remain elevated and there is some sentiment building that we might see another small hike or two in the coming months and that interest rates may remain elevated for longer than anticipated. That is the reason for the continued volatility in your portfolios; the bad news as it were. The good news as I see it is precisely the action that central banks are taking when they raise rates. They do so because they know it is the most effective tool to fight high inflation. In football terms, it is their playbook. I think that’s what gives me comfort; although we do not know the precise end date for high inflation and rate hikes, we do know that it will end. And although we do not know whether there will be a recession because of such hikes, we do know that too will end. It has happened so many times before and will certainly happen again in most of our lifetimes. Equity markets are accurate by the second at providing a price for the things we own, which matters only if we intend to sell them. I am always happy to discuss the nuances of ‘this time’ in the markets, although I am more long-winded in person – feel free to reach out to discuss if you are so inclined!

 

I recently discussed income from portfolios with a client and we did a thought experiment to help him understand why the volatility in his investment portfolio shouldn’t be as concerning as it is made out to be. Like many of my clients, this person has a rental property which generates a consistent stream of income for the building owner, so long as there is a tenant in the building. For this reason, my client never worries about what the actual building is worth, so long as the tenant is paying the rent on time. Why should our portfolios be any different? Companies set the dividends that they pay on a per share basis, as they do with the interest they pay on bonds. In both cases, that amount is a dollar figure. We can use the dividend for TD bank, one of our most widely held positions, as an example. Currently, TD bank pays a dividend of $3.84 per share, ¼ of which gets paid every 3 months. Unless TD bank decides to cut its dividend (something they have not done in my lifetime, nor long before it), then shareholders can rely on this ‘rental income from the tenant’ of $3.84 per share that they own each year. If TD bank’s stock price increases by 20% per year, the dividend does not change. The only time the dividend will change from $3.84 per share is if/when the company’s board of directors decides to change it. If we think about the total dividends in our portfolio from all our companies this way, then we will worry less about the overall value. If the cheques clear each month, so to speak, then life ought to be good. 

 

We have a strategy precisely to take advantage of this effect, called our Canadian Dividend Growth strategy. As the name suggests, it is comprised of companies who have a consistent track record of increasing their dividend each year. Companies do this when their businesses are doing well and they feel they can return more of their money to shareholders directly, rather than needing it for something else (maintaining or growing the existing business). Unlike rent controls with tenants, there is no limit to the amount that a company could increase its dividend by, in theory. It simply depends on the size and profitability of the company itself. As with our other two strategies, portfolio performance is on our website. I think a focus on dividend payment and dividend growth is healthier for most of us to remove the noise around the daily equity market volatility. Much like when we would stare at a clock back in grade school, progress seems to stand still when we are constantly checking. Alternatively, one could look in after a year or two and see that things have been progressing along nicely. It just doesn’t happen as consistently as any of us would like. 

 

I trust this note will find you well and I thank you again for your continued support of our group. As always, we look forward to hearing from you, and I anticipate that we will have a client event either later this fall or early in 2024. More on that when I figure out the plan. Until then, please do not hesitate to reach out. 

 

Best regards, 

George

 

 

Toronto-Dominion Bank Disclaimers 2a This company is a client for which a CIBC World Markets company has performed investment banking services in the past 12 months. 2c CIBC World Markets Inc. has managed or co-managed a public offering of securities for this company in the past 12 months. 2e CIBC World Markets Inc. has received compensation for investment banking services from this company in the past 12 months. 2g CIBC World Markets Inc. expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. 3a This company is a client for which a CIBC World Markets company has performed non-investment banking, securities-related services in the past 12 months. 3c CIBC World Markets Inc. has received compensation for non-investment banking, securities-related services from this company in the past 12 months. 7 CIBC World Markets Corp., CIBC World Markets Inc., and their affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities issued by this company.