Why the Stage is Set for Dividend-Paying Equities

CIO Rob Lauzon explains how Middlefield Group’s Income Plus Fund is tactically positioned amid economic headwinds

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  • Why the Stage is Set for Dividend-Paying Equities
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Confronted with challenging geopolitical events, the broader world economic landscape is teetering on the brink of deceleration. This anticipated slowdown is poised to set the stage for a series of interest rate reductions throughout 2024. Such potential adjustments are expected to catalyze a resurgence in dividend stocks. The anticipated rally is particularly advantageous for the predominant assets within the Middlefield’s Income Plus mutual fund, positioning it favorably for upcoming financial currents.

Middlefield’s Chief Investment Officer, Rob Lauzon says, “We feel the hiking cycle is over which is an important first step for capital to start to flow back into dividend paying equities. We recognize the era of “free money” is over and the level of interest rates will be higher for longer, however we are essentially back to the “old normal” of more sensible pricing of debt. The market always faces challenges and recent geopolitical conflicts just add to the wall of worry.”

Positioned to withstand macroeconomic shocks

The fund’s strategy to buffer against macroeconomic shocks involves investing in companies with inelastic demand characteristics. Entities like Topaz Energy and Enlink Midstream are exemplars of this approach, boasting robust, durable revenues from royalties and energy transportation. Similarly, real estate investments in multi-family apartments, mobile tower operations, in addition to utilities like Enbridge and Altagas provide a hedge against market volatility while generating resilient cash flow streams.

Dividend investment is central to the fund’s ethos, being a historically reliable approach with a strong performance record. “Dividend investing is not as easy as it may seem – ‘chasing yield’, or buying the highest yielding stocks, has been shown to be a dangerous strategy that results in below-market returns with much higher risk,” Lauzon points out, “Dividend growth combined with re-investment is crucial for long-term investors who want to most efficiently compound their return.” This focus on sustainable dividends aligns with the fund’s long-term compounding strategy, which is particularly advantageous for advisors’ portfolios.

When mitigating portfolio volatility, the fund turns to sectors with defensive and predictable earnings. The healthcare sector, with its inelastic demand for products and services, provides stability and is less susceptible to economic downturns. As Lauzon says, “The majority of healthcare spending is paid for by the government or insurance companies and does not come from the pockets of consumers. As a result, healthcare spending does not factor into the discretionary budgeting decisions that many households typically make in a slowing economy.”

Attractive opportunities

Looking ahead, the fund maintains a bullish stance on the Canadian market, “I wouldn’t be so eager to throw in the towel on Canada.” He highlights the country’s high population growth, skilled workforce, natural resources, and energy export capabilities as underpinnings for an undervalued equity market.

With regards to the energy sector, recent geopolitical events have only reinforced the fund’s positive outlook. Canada’s energy sector is expected to benefit from improved global market access and disciplined capital management, contributing to higher dividends and share buybacks. Renewable energy, while facing near-term headwinds, is seen as integral to the energy mix, particularly as the world transitions to cleaner sources like natural gas.

Over the next 5 to10 years, utilities and renewables are projected to play a crucial role in the “electrification of everything,” driving sustainable growth as demand for electricity surges. Despite current challenges, the fund anticipates a rebound, with renewables potentially outperforming as they align with government policies and corporate demand for cleaner energy.

The fund also identifies a “generational opportunity” in REITs, particularly in sectors undervalued due to market overreactions. Lauzon reveals, “There is a valuation disconnect in the public markets for high quality real estate as grey clouds surrounding the office market has caused investors to shun the whole sector. This is providing the entry point at 20% discount to net asset values in the Industrial, necessity-based Retail and Apartment REITs.”

The primary risks to the portfolio are a severe recession, which could impact company margins and stock valuations, and a substantial increase in oil supply that could depress prices. However, the fund’s diversified approach and focus on sustainable dividends aim to mitigate these risks and capitalize on the market’s eventual rebound.

 

 

Disclaimer

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. You will usually pay brokerage fees to your dealer if you purchase or sell units/shares of investment funds on the Toronto Stock Exchange or other alternative Canadian trading system (an “Exchange”). If the units/shares are purchased or sold on an Exchange, investors may pay more than the current net asset value when buying and may receive less than the current net asset value when selling them. There are ongoing fees and expenses associated with owning units or shares of an investment fund. An investment fund must prepare disclosure documents that contain key information about the fund. You can find more detailed information about the fund in these documents. Mutual funds and investment funds are not guaranteed, their values change frequently and past performance may not be repeated. Certain statements in this disclosure are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend upon or refer to future events or conditions, or that include words such as “may”, “will”, “should”, “could”, “expect”, “anticipate”, “intend”, “plan”, “believe”, or “estimate”, or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained herein are based upon what Middlefield Funds and the portfolio manager believe to be reasonable assumptions, neither Middlefield Funds nor the portfolio manager can assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.

This material has been prepared for informational purposes only without regard to any particular user’s investment objectives or financial situation. This communication constitutes neither a recommendation to enter into a particular transaction nor a representation that any product described herein is suitable or appropriate for you. Investment decisions should be made with guidance from a qualified professional. The opinions contained in this report are solely those of Middlefield Limited (“ML”) and are subject to change without notice. ML makes every effort to ensure that the information has been derived from sources believed to reliable, but we cannot represent that they are complete or accurate. However, ML assumes no responsibility for any losses or damages, whether direct or indirect which arise from the use of this information. ML is under no obligation to update the information contained herein. This document is not to be construed as a solicitation, recommendation or offer to buy or sell any security, financial product or instrument.

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  • Why the Stage is Set for Dividend-Paying Equities
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