Tag Archives: inflation

Ukraine invasion underlines investors’ need for super diversification

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It’s scary times for everyone, investors included. As this site focuses on Financial Independence, I’ll try in this blog to direct readers to some useful sources of financial advice.

We’ll start with MoneySense, since in my role as Investing Editor at Large, I’m on top of much of the investing content there.

First, I’d point to Allan Small’s article that appeared over the weekend: The Meaning of market swings and why you should care. Allan recaps current trends in rising inflation and rising interest rates, noting that geopolitical uncertainties can create buying opportunities on certain stocks:

“The key is to make sure your portfolio is diversified. It’s the best — and cheapest — strategy to protect your portfolio in any environment. Balance it with different sectors of the economy.”

Second, Dale Robert’s weekly market wrap for MoneySense always has plenty of good insights into up-to-the-minute market action. His February 27th instalment of Making Sense of the Markets is particularly instructive. Hub readers will be familiar with Dale’s own site, Cutthecrapinvesting, as we regularly republish Dale’s blogs here on the Hub (with his kind permission, of course!).

Here’s Dale’s recent blog on the Ukraine situation. Here’s an excerpt:

“Even a few weeks ago it was easy to predict what would help investors make their portfolios more battle-hardened. Gold and energy certainly rose to the unfortunate occasion.”

Ever since Covid hit, Dale has been furnishing sound investment ideas, often ahead of the rest of the financial blogosphere. For example, he was one of the earliest to sound the alarm that Covid would be a serious problem for investors. He was also early in recommending energy plays like Eric Nuttall’s Nine Point Energy Fund (NNRG) and inflation-fighting recommendations like the Purpose Real Assets ETF (PRA.) That’s one reason why we included Dale as a panelist in MoneySense’s yearly ETF All-Stars feature: the 2022 edition will be out this spring, albeit under the direction of a new writer, Bryan Borzykowski.

No one ever made a dime panicking

How am I responding to the financial aspect of this crisis? Well, as Mad Money’s Jim Cramer often reminds readers in such times, “No one ever made a dime panicking.” Just yesterday, The Successful Investor publisher Patrick McKeough reminded Hub readers that short-term investment decisions all too often sabotage long term returns.

Patrick has been hugely consistent over the years with the following three-fold guidelines, which are as relevant during this Ukraine crisis as in they are in sunnier times:

1.) Invest mainly in well-established, dividend-paying companies;

2.) Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities);

3.) Downplay or avoid stocks in the broker/media limelight.

In his Inner Circle Advice bulletin issued after Tuesday’s market rout, McKeough titled one section “Putin goes for broke” while urging investors to stay the course if they adhere to the three points above:”In the past third of a century, Russia has gone from dictatorship to fledgling democracy and back to dictatorship. If his Ukraine venture goes awry, it could be the end of the Putin era and the start of a new try at western-style government for Russia.

“Meanwhile, we advise sticking with your portfolio if your investments are in tune with our Successful Investor directives. Now, though, is a good time to re-emphasize that recent IPOs tend to be a poor investment choice, on average. But that’s especially so in a market situation like this one, in which volatility is likely to be above average for some time.”

Some other newsletters to which I subscribe recapped historical market action in advance and during prior outbreaks of war and invasions; generally they found that investors who “bought the invasion” eventually did well.

On the other hand, in an article in the Globe & Mail this Monday, veteran commentator Gordon Pape suggested it wouldn’t hurt to raise cash where you have significant capital gains: while they’re still gains. You can find the article, albeit paywalled, by clicking on this highlighted headline: Investors should take these steps to protect their portfolios from  the Russia-Ukraine conflict.  Pape also warned, as have many pundits, that if Russia does get away with its Ukraine invasion, it may embolden China to make a similar move on Taiwan.  Continue Reading…

Dividend Stocks: Completing the Income Puzzle

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Franklin Templeton, iStock

By Les Stelmach and Ryan Crowther

Franklin Bissett Investment Management

(Sponsor Content)

It’s no secret that yields on fixed income investments have been in a prolonged slump for decades, challenging both individual investors to meet their income needs and institutional investors like pension funds and insurance companies to deliver on their obligations to retirees.

While some investors have moved further out the fixed income risk spectrum in pursuit of higher yields, others are diversifying their income sources by adding to their investments in shares of dividend-paying companies.

Dividends are playing catch-up

Despite recovering economic conditions, dividend-paying stocks lagged the overall market in 2021. Given continued uncertainties directly and indirectly related to the COVID-19 pandemic, dividend growth in general reflected some conservatism. Many factors influencing earnings growth in 2021 were sector-specific. Some industries continued to deal with subdued demand compared to pre-pandemic levels, while in other cases, regulators prohibited dividend increases at the onset of the pandemic.

Lately, however, dividend payers’ shares have performed well for several reasons:

  • Despite rising inflation, supply-chain pressures and labour shortages, corporate fundamentals have generally remained supportive as revenues, earnings and profit margins have continued to perform well.
  • Valuations for many dividend stocks are firmly anchored to those fundamentals, insulating them somewhat from market concerns over valuations in a higher-rate environment.
  • In addition to many companies initiating, restoring or raising their dividend payouts, the share prices of many dividend-paying stocks benefited from market momentum in a “best of both worlds” environment.
  • Market sentiment has shifted in response to signals from both the U.S. Federal Reserve and the Bank of Canada indicating a faster pace of interest rate increases in combination with quantitative tightening.

Dividends likely to grow

The average earnings per share growth for the Canadian S&P/TSX Composite and the U.S. S&P 500 Indices spiked last year. Dividend increases were broad-based throughout the year. Barring any major economic setbacks, we expect continued steady dividend growth from companies across many sectors. Average cash as a percentage of total assets held by constituents of the S&P/TSX Composite Index is at levels not seen in more than 20 years: another positive development for dividend growth.

In Canada, we are finding certain sectors particularly attractive:

Financials: Banks are an example of dividend growth held back by regulators from the pandemic’s onset. In 2021, even though  earnings grew, dividends were temporarily constrained; however, this restriction was lifted last November. Most recently, we have seen the Canadian banks increase dividends between 10% and 25%, but we believe there could be room for further increases. Banks retain excess capital, and at the very least, we believe the group will resume their annual pattern of increases from this point. In our view, Canadian banks are on very solid footing and offer some of the most attractive valuations.

Commodity-related: Commodity prices are high as economic activity resumes from pandemic lows, which is positive for the energy and materials sectors, and by extension, industrials. We have seen a remarkable recovery in oil prices since the precipitous drop in the spring of 2020 when the global economy shut down in response to the spread of COVID-19. At that time, a number of energy stocks had their dividends cut as the depth and duration of the economic downturn were unknown.

Since then, the oil and gas sector has staged a dramatic comeback, with higher prices boosting cash flows. Along with the recovery of prices, we also have seen a significant pick-up in dividends. Companies are employing various dividend strategies. Some prefer methodical increases to the base dividend level at a rate sustainable under a range of commodity price scenarios; others are considering variable dividends or periodic special dividend payments on top of the base dividend level. We believe boards and management teams are exercising a certain degree of caution to avoid being vulnerable if oil or gas prices experience a sharp decline in the future.

Real estate: In certain property categories (primarily retail), real estate investment trusts (REITs) had to absorb higher vacancies and deferred rent payments from tenants as stores were temporarily closed due to pandemic restrictions. These stresses often manifested as flat cash distribution profiles or, in some cases, temporary reductions in distributions. Although it’s too early to be certain of a return to historical norms across all property classes, we are seeing encouraging signs in rents and occupancy, and we note some REITs are again raising distributions.

Utilities and telecoms have maintained their dividends throughout the pandemic and we expect their dividend growth trajectories will be in line with historical experience.

Risks and opportunities

Consistent and growing dividends are characteristic of higher-quality, established companies that by definition tend to sit comparatively lower on the equity risk spectrum. It’s important to remember that like any stock, they are subject to equity market levels of volatility; but stable to growing dividends can reduce part of that risk as investors continue to receive income distributions even in a volatile market. In a rising market environment, investors could benefit both from the dividend yield and a higher stock price. Continue Reading…

Retired Money: Do Inflation-linked Bonds make sense in an era of rising interest rates?

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My latest MoneySense Retired Money column, which has just been published, can be found by clicking on the highlighted headline here: Do inflation-linked bonds make sense in an era of rising interest rates?

The topic is one that until mid 2021 received relatively scant attention: Inflation-linked Bonds and/or ETFs that own them. In Canada, these are called Real Return Bonds (RRBs) while their equivalent in the United States are called Treasury Inflation Protected Securities (TIPS). There are ETFs trading both in Canada and the US that let users own baskets of these securities.

Of course, inflation didn’t seem to be a huge issue for investors until around the summer of 2021 and then the fall, when suddenly the headlines were full of ominous new levels of inflation not seen in years or decades.

These days, traditional non-inflation bonds, or “nominal” bonds famously pay very little in interest, and net returns net of high inflation can easily end up being negative. The idea with RRBs or TIPS is that If inflation ticks above certain levels, such bonds or ETFs holding them  tack on extra interest payments roughly commensurate with the rise in the official inflation rate.

Inflation plus Rising Interest Rates

But the column addresses the question of what if the longer-term bonds held in these funds inflict capital losses when interest rates spike at the same time? That’s the problem with some Canadian RRB ETFs that hold too much in long- or mid-term bonds, and most of them do. 2021 was not a good year for funds like the iShares Canadian Real Return Bond Index ETF (XRB) or the BMO Real Return Bond Index ETF (ZRR), which lost almost 5% in the first nine months of 2021, but ended the year slightly positive.

This is less of a problem if you hold RRBs directly: Real Return Bonds issued by Ottawa have long maturities, ranging from five years out to 30 and even 40 years out. I use to own some of these directly, listed as Government of Canada Real Return Bonds, maturing in December 2021 .When I tried to find a new series at RBC Direct Investing, none seemed to be available online. I discovered you can buy newer issues by calling the discount brokerage’s bond desk. The column describes one maturing in 2026 [which I ultimately purchased, although it is now slightly under water] and a second in 2031.

US TIPS ETFs hedged to Canadian dollar

But if you want to diversify through funds, minimize interest rate risk and get exposure to both RRBs and TIPs, there’s a lot more choice with US-traded TIPS ETFs like the Vanguard Short-term TIPS ETF [VTIP], which hold mostly short-term bond maturing in under five years. Continue Reading…

Canadians worried about Inflation’s impact on their retirement savings, Questrade survey finds

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It’s here, it’s not going away anytime soon, and every time you open a business news article, the word leaps out at you: “inflation.”

And, according to a recent Leger survey commissioned by Questrade of 1,547 Canadians, it’s not only very much top of mind for us, but it’s keeping many of us awake at night: not just about the short-term scenario, but also when we contemplate our retirement future.

According to the survey, four in five (84%) Canadians say they are worried about inflation, with almost two in five (39%) saying they are very worried.

For the short term, most of the Canadians surveyed are concerned about the everyday costs associated with rising inflation. More than eight in ten (86%) who are apprehensive about rising inflation say what worries them most is the increasing cost of food, while nearly as many (82%) are concerned about the increasing cost of everyday items. And not far from mind is the impact of inflation on savings and investments: 45% of those surveyed expressed concern about how inflation would affect their savings and investments, with 51% of those who are investing for their retirement saying this.

Investors are less worried about inflation than non investors

However, while many Canadians are experiencing inflation angst to varying degrees, those taking steps to invest for their retirement appear to be in a better overall frame of mind than those who aren’t. In the Questrade survey, of the 39% who say they are very worried about inflation-related costs, the worry is less with those investing for retirement (36%), compared to those not investing (49%). In particular, those holding an investment vehicle such as a mutual fund, RRSP, or TFSA appear to be consistently less worried about rising inflation than those not holding these products.

For those who are concerned about the longer-term impact of inflation on their investments and retirement, 39% are worried about the cost of living when they retire, followed closely by 38% who are concerned about lower purchasing power.

What’s interesting is that, despite their inflation anxieties, only one quarter of Canadians (23%) have made a change to their investments to safeguard themselves from possible inflationary effects. The remaining 77% either don’t know or haven’t made any change.

Of those who are making changes to their investments due to inflation, 24% are planning on contributing less while 22% are going to contribute more this year. The survey revealed that among those with an RRSP, 39% say they plan on contributing more to it this year, especially those aged 18–34 (57% vs. 36% for those aged 35+), with an average of about $5,409 extra. The reasons for contributing more to their RRSP vary, but for nearly half, it’s because retirement is a priority for them. Continue Reading…

Inflation and Central Banks: Like having a Friend climb a Ladder

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By John De Goey, CFP, CIM

Special to the Financial Independence Hub

Various people have asked me to weigh in on our inflation situation with a particular focus on what central bankers should do about rates going forward.

The ‘what to do’ elements include queries about when to hike, how much, how often and to what end.

I like to use metaphors and the one that fits here is one of having someone you care about climbing a ladder.  In this scenario, the ‘friend’ is a mashup of the economy and markets (specifically, both the stock market and the real estate market), the ascension up the ladder is the seeming inexorable climb of prices and valuations, and the decision to tip the ladder over is the decision to raise rates.  Here’s the problem …

Let’s say someone you care about is climbing a ladder and you have been given the task of holding the ladder steady, stable, and firmly rooted on the ground while that person climbs.  In this case, “price stability” equals “ladder stability.” It’s a tall ladder and conditions are becoming increasingly perilous.  As your friend ascends, it eventually becomes clear to you that communication has been lost: your friend is now so far up that they cannot hear your pleas to reverse course.  It’s dangerous.  You know it, but your friend keeps climbing higher.

Central bankers caught in a dilemma

In this scenario, you know that if you were to tip the ladder over, your friend would be seriously hurt.  Conversely, you could do the ‘responsible thing’ and not tip the ladder over, but if you did that and your friend ended up falling from an even higher position, the consequences could be deadly.    Central bankers are caught in the horns of a dilemma. Continue Reading…