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Posted by Graeme Cooper on Aug 27th, 2020

Why your dividend strategy should look forward

Dividend investing has always been a core strategy that we’ve stood behind here at Purpose. Purpose Core Dividend Fund (PDF) was one of the first products we launched because we believe a smart, income-oriented strategy is key to any investor’s long-term success. The importance of dividend-payers has only grown over time, especially as central banks have kept interest rates low. Markets change, testing traditional beliefs – something our CEO, Som Seif, discussed in a podcast on dividend investing. And our strategies have to reflect these new realities.

We’ve always said PDF is the optimally designed dividend fund for Canadian investors. While its strategy has evolved, its foundation hasn’t changed:

  • Intelligent portfolio construction, built first with Canadian equities and complemented with US exposures where our domestic market lacks depth (for example, health care and information technology)
  • Superior risk management through broader sector diversification, reducing reliance on traditional income-oriented sectors
  • Smart equity selection through disciplined quantitative techniques
  • Tax efficiency through a corporate class structure

It’s a blue-chip strategy, but we are always looking for exciting ways to improve on the tried and tested. Most recently, we’ve made some changes to address the fact that quant models inherently struggle to anticipate massive regime changes, like the one we’re witnessing as a result of the COVID-19 pandemic.

Since the crisis hit, we have begun leveraging our access to the large, fundamental analyst team at Neuberger Berman to forecast the specific impact on buyback yield and dividend sustainability in the Fund’s investable universe. Our models now incorporate forward-looking data, making it easier to anticipate and avoid companies which are more likely to cut or eliminate dividend payments.

The benefit of this enhancement was seen very early on, as we removed Suncor Energy from the portfolio in the weeks before the company slashed its dividend. We also added robust businesses on the consumer side, such as CVS Health, where our research indicates dividends are likely safe. And we have moderately increased our exposure to Canada’s banking sector, which has lagged the early stages of this bounce, but shows continued strength in dividend coverage.

Chart of Dividend Diversification
Source: Bloomberg, as of August 24, 2020.

The key here, as always, is enhancing risk management to avoid the false positives – the companies paying high dividend yields that look solid on a backward-looking basis, but are destined to struggle. We knew that putting our best foot forward in this new environment required another re-think of the specifics of our approach. We believe smart security selection is more critical than ever.

Of even greater importance than what we have done, is what we haven’t done. From a yield perspective, a quick glance suggests there are a ton of great deals to be had. But with an informed forward-looking view, we know that many of those yields are at serious risk.

The addition of this important fundamental analysis builds on the previous enhancements we’ve made to the Fund. Back in mid-2018, we made the security-selection process more stringent and multi-dimensional by tightening up our quality screens and broadening our ranking methodology to incorporate dividend coverage, momentum and low-risk characteristics. We also increased the number of holdings to 60, reducing exposure to any single point of failure. In 2019, we added ESG as a factor to reflect our belief that sustainable business practices benefit investors over the long-term.

All of these changes are consistent with our discipline of risk management. We have now seen our efforts proven time and again. PDF has built a robust, long-term track record. The Fund not only has delivered in good times, but has especially outperformed when markets correct.

Purpose Core Dividend Fund chart above-average total returns versus S&P/TSX Canadian Dividend Aristocrats Index
Source: Bloomberg, as of August 26, 2020.

At the end of the day, we believe that the extraordinary monetary policies deployed by the world’s central banks will push investors further out the risk curve for income and ultimately into dividend equities. This will provide a tailwind to the asset class relative to the broad market, but outcomes will differ materially across businesses. Chasing yield or historical growth is a poor strategy to avoid the fallout. Visit our fund page to learn more.

— Graeme Cooper is Vice President of Product at Purpose Investments

All data sourced to Bloomberg unless otherwise noted.

The content of this document is for informational purposes only, and is not being provided in the context of an offering of any securities described herein, nor is it a recommendation or solicitation to buy, hold or sell any security. The information is not investment advice, nor is it tailored to the needs or circumstances of any investor. Information contained on this document is not, and under no circumstances is it to be construed as, an offering memorandum, prospectus, advertisement or public offering of securities. No securities commission or similar regulatory authority has reviewed this document and any representation to the contrary is an offence. Information contained in this document is believed to be accurate and reliable, however, we cannot guarantee that it is complete or current at all times. The information provided is subject to change without notice and neither Purpose Investments Inc. nor is affiliates will be held liable for inaccuracies in the information presented.

Commissions, trailing commissions, management fees and expenses all may be associated with investment funds. Please read the prospectus before investing. If the securities are purchased or sold on a stock exchange, you may pay more or receive less than the current net asset value. The indicated rate of return is the historical annual compounded total return including changes in share/unit value and reinvestment of all distributions and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated.

Fund mentioned in this story

Graeme Cooper