From todays Globe and Mail Extra fuel for the dividend stock rally
Interest rates are heading lower on the back of central bank rate cuts and it takes only a Fisher-Price level of market knowledge to know that dividend paying stocks should perform well as a result. CIBC Capital Markets managing director of equity research Ian de Verteuil, however, is adding some excitement by suggesting that the move higher in income stocks might be turbocharged by other recent trends this time.
The Bank of Canada overnight rate had climbed to 5 per cent by the end of the third quarter of 2023, territory it had not visited since 2007. Bond yields and GIC rates were dragged higher, which pulled investor assets away from less attractive utilities and REITs and other equity income instruments.
Using bank balance sheets, Mr. de Verteuil estimates there is over C$200-billion in excess (not explained by conventional asset allocation) investor assets in fixed income products. This includes money market, high interest savings accounts and GICs.
The strategist believes that dividend-paying domestic stocks are “a more natural traditional home for these funds” than risk-free instruments and expects them to move back into equities. He cited favourable tax treatment and dividend growth as important reasons for this, as well as widespread business and earnings stability among income-generating equity sectors. I’ll add that an aging population in need of steady income streams adds to demand and stock prices.
As for timing, Mr. de Verteuil is using the 35-year history of Canadian bank term deposits as a template. He found that outflows have occurred 350 to 400 days on average after the peak in short-term bond yields. The domestic two-year bond yield peaked on Sept. 20, 2023 and has declined steadily since. September 20, 2023 was 355 days ago.
There are already signs of investor interest in dividend stocks. BMO analyst Michael Markidis, for example, noted Monday that the S&P/TSX Capped REIT index’s three-month return of 14.7 per cent outperformed the S&P/TSX Composite by 11.2 per cent, and that’s before accounting for the yield.
Falling risk-free bond yields are an undeniable tailwind for equity income sectors. If Mr. de Verteuil is right, and investor assets are just beginning to add fuel to the rally by migrating back into dividend-paying stocks, the party has just begun.