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Getting Exposure to Increasing Dividends in Canada

Buoyed by recovering economic conditions, the loosening of pandemic-related regulatory restrictions, and improved corporate earnings, several Canadian companies have recently raised dividends, with several more expected to follow suit in the coming months.

November 2021

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Chris Heakes

CFA, M.Fin., Director, ETF Portfolio Manager

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Buoyed by recovering economic conditions, the loosening of pandemic-related regulatory restrictions, and improved corporate earnings, several Canadian companies have recently raised dividends, with several more expected to follow suit in the coming months. The power of dividend-based investing has been quite strong, with yield-based growers leading the pack.

Implementation:

The Opportunity:

  • Some dividend increases, in particular Manulife (MFC) and Sunlife (SLF), have been linked to recent OSFI relief for federally regulated financial institutions. While the above companies acted quickly to declare additional dividends, many investors have their eye on the banking sector, which is set to report around November month-end, and may elect to announce dividend increases at that time. Several analysts are anticipating dividend payouts to return to historic levels, with a forecasted increase of 18% on average.2
  • Canadian markets have been fundamentally attractive, as indicated in the charts below, trading at a significant valuation discount, when compared to the U.S. As economic recovery continues to take hold, Canada is a target of international investors seeking growth exposure beyond the U.S.
  • In addition to the attractiveness of growing dividends in the banking sector, several Canadian companies have already increased their dividends this year, spurred by economic recovery and improved commodity prices. Suncor recently announced a 100% dividend increase to restore its pre-COVID dividend yield. Such trends are not ignored by the market, and have been well received by investors. BMO Mutual Funds – whether banks or broader dividends – are a compelling way to access Canadian dividend recovery.

Chart 1: Selected Dividend Increase

Source: Bloomberg, as of November 15, 2021.

  • The table above lists select companies that have raised their dividends in the second half of 2021. In general, corporate financial health is strong, with credit spreads low, and many companies cash-rich.
  • Investors are excited about the prospect of Canadian banks raising their dividends. As mentioned above, restoring payout ratios to historical ranges will require dividend increases of 10%-30%, depending on the institution. With an average bank dividend yield of 3.4% as of November 15, 2021, a 15% dividend hike would raise the average yield to 3.9%, a meaningful increase for investors who follow dividend streams as a methodology to value companies.

Chart 2: Canadian Equities Are Attractive


Source: Scotiabank GBM Portfolio Strategy.

  • Bolstering the case for Canadian equities in general is their extreme relative valuation, versus the U.S. market. As noted in the charts, U.S. to Canadian forward price-to-earnings (P/E) ratios are at an extreme, last seen during the IT bubble of 2001. While the U.S. continues to exhibit market strength and investor confidence, investors are more likely to turn to other regions with better valuations.

Chart 3: Dividend Investing in Canada

Source: BMO Capital Markets, equally weighted return baskets, January 1990 to August 2021.

  • The chart above is a clear illustration of the power of dividend investing in Canada. While the S&P/TSX has delivered a solid 8% annualized return, with 14% volatility, its exposure to dividend-growers and dividend-payers has not only added to the returns, but also reduced volatility. Reducing and eliminating dividend-cutters and non-dividend-paying stocks from the portfolio has generally led to better results over the longer term. Canadian banks have a 25-year-plus history of not reducing dividends, and regularly increasing them, falling squarely in the dividend-growth bucket. In addition, the dividend construction methodology behind the BMO Covered Call Canadian Banks ETF Fund and the BMO Covered Call Canada High Dividend ETF Fund focuses on names that have paid dividends for 3 years, have not cut dividends, and have sustainable payout ratios and credit profiles to continue generating payouts in the future.

Conclusion:

  • Sustainable dividend investing is a historically proven approach to effectively achieve growth and mitigate risks, relative to the broad index. Canadian markets, in general, are attractively valued, when compared to the U.S., and several companies have either raised their dividends this year or are poised to do so in the next few months. Gaining exposure to these tailwinds through Canadian banks or through a broad dividend strategy offers compelling value for investors, while providing attractive exposures with increased income using a covered call overlay.

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For a summary of the risks of an investment in the BMO Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.

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