Global Dividend Perspectives | Mackenzie Investments

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Global Dividend Perspectives

Darren McKiernan tackles risk with dividend growers

Darren McKiernan, who heads the Mackenzie Global Equity & Income Team, offers compelling reasons for Canadians to include global dividends in their portfolios.

In this video, McKiernan explains why choosing companies from around the world that are able to grow their dividends can help enhance income and mitigate risk, and where he’s finding value for Mackenzie Global Dividend Fund.

Global Dividend Perspectives

Darren McKiernan tackles risk with dividend growers

To help get these insights working for you, talk to your advisor.

Show transcript

DARREN MCKIERNAN: Well, first and foremost, one has to realize the importance of dividends to overall returns, not just in Canada, but around the world. In fact, dividends have made up over 50% of overall returns in almost all developed markets around the world, not just Canada, but in the US, in UK, in Europe, and in Asia. And if you look at the payout ratios today, they're actually relatively low compared to history. So I think, as those payout ratios go up, the importance of dividends to overall return is only going to increase over time.

The second point I'd make with respect to Canada is, as we all know, Canada is a very concentrated market. Lots of banks and financials and natural resources. By stepping outside of Canada, it allows investors to get exposed to much more diverse industries, high-quality businesses that are [? resident ?] in such things as luxury goods, consumer products, medical devices and pharmaceuticals, software and information technology. These are all very good industries with high dividend yields, strong free cash flow generation. And simply, as a Canadian investor, you don't have access to these things in Canada.

Well, the first risk that I think people have to be concerned about is the permanent loss of capital risk. That means simply buying a company up here, having it go down here and never recovering. We protect against that risk in two ways. First and foremost, we buy what we think are very good, predictable businesses, companies with great economics, high free cash flow conversion, great return on invested capital, and businesses that we kind of understand and know that will be around not just next year but in 5, 10, and 15 years.

Secondly, we buy these companies at what we consider to be discounts to intrinsic value. So when you combine really good businesses with predictable long term economics, selling below what we think they're worth, that's a great way of avoiding those permanent loss of capital situations.

The second risk that Canadian investors face – and it's a more subtle risk – is that of inflation. Your assets are eroding. We all know your children's education is getting more expensive every year. The cost of your phone bill, the cost of housing, these are all things that go up significantly over time. You want businesses that can price their products at or above those levels. And a great way of doing that is owning companies that pay dividends, that pay companies that have grown dividends. And there's many companies in the fund that haven't just paid the dividend out for many years, but have grown that dividend 10, 20, in some cases over 50 years. I think this is a great way of preserving that purchasing power as a Canadian investor.

Well, I think there are two areas right now. Specifically, I actually still see value in information technology. In fact, technology companies make up 5 of my top 20 positions currently in the fund. I'll just use two examples, Microsoft and Oracle. Now, we all know these companies. They provide mission critical software to the global 1,000 companies in the world. And what I mean by mission critical is, if you were to take these products out of a company's infrastructure, it would be akin to you or I having open heart surgery. So clearly very high switching costs. But what's more fascinating with respect to the global dividend fund is what these people are doing with their free cash flow, which is significant and substantial. They're taking that free cash flow, not just buying back stock, but they're raising their dividend double digits, much faster than their underlying earnings growth. I think this is a very significant trend for these businesses, I think a trend that's going to continue.

Another area, I would say, that we're starting to find value in, obviously with the developed markets having gone up 20 and 30% over the past year, we're finding opportunities in emerging markets, specifically in Brazil. Obviously the Brazilian market has been off 20% over the past year compared to what the rest of the world's done. So by definition you're going to find better opportunities in things have gone down versus things that have gone up. And we in fact have initiated two small positions in Brazilian companies. Obviously these are high quality businesses. We're being very careful what we own in these markets. But this is where we're seeing some opportunities.

I think as a income-oriented investor or a dividend-oriented investor, one has to be mindful the day when interest rates start moving up. Because these investments will be impacted. We've tried to mitigate that risk by avoiding what are known as the dividend payers. Industries such as utilities, infrastructure assets, real estate investment trusts, these are all companies that pay out almost all their free cash flow in the form of dividends and have very little wiggle room to grow that dividend payout ratio. We think there's just simply better value owning what we consider to be dividend growing companies. These are companies that still pay out a very healthy dividend, oftentimes it well in excess of what you can get for a 5- or 10-year government bond, but still leave enough room to grow that payout ratio and also invest in capital expenditures, mergers and acquisitions, basically doing things that are creative and positive for long-term growth for these dividend income streams.

Well, the fund has actually transitioned quite significantly since I've taken it over. Previously the fund was an infrastructure fund, and as a result it had certain exposures. For instance, 30% of the fund was in Canada. Today, the fund has very little to none exposure in Canada. About 50% of the fund is in the US, 35% of the fund is in continental Europe and the UK, and the rest is spread throughout the world.

Secondly, the fund was very concentrated in two specific sectors, those being utilities and industrials. Today the fund is much more globally diversified from a sector standpoint. It has representation in health care, information technology, and consumer products. So in that context, it's gone from an infrastructure fund to a truly globally diversified equity fund focusing on dividends.

Well, maybe if we first step back and just look at the fund today. Right now, the fund itself is selling for about 14 times earnings. It's got about a 3% dividend yield. The average operating margin for the companies in the fund is about 25%, and the average return on equity is about 30%. By my calculations, my estimates, I believe the fund is selling for about a 15% discount to its intrinsic value. So that's OK. Now, of course if you step back to 2009, things were much cheaper then. The funds and the companies I own today were selling for about a 30 and 40% discount. So in that context, obviously things have gone up by definition, with the market having gone up 2, 2 and 1/2 fold. But I still think this fund is appropriately valued for the quality of the businesses they're in, and if you've got a long-term time horizon, I think investors will be well served.