Canadian banks are sound investments that should not be lumped in with struggling regional players in the U.S., says Tim Johal of Mackenzie Investments.
The vice-president of investment management, and portfolio manager on the Mackenzie North American equities team, said much has been made of the recent failures of Silicon Valley Bank, Signature Bank and First Republic. But parallels should not be drawn with Canadian financial institutions.
“Our banks are world class,” he said on the latest episode of the Soundbites podcast. “They are better risk managers, they’re more profitable, they’re more predictable and less volatile.”
In discussing current opportunities in dividend investing, Johal put Canadian banks near the top of the list, saying their risk levels are much lower than they are in the U.S.
“We don’t think you’re going to see any significant loan losses at the banks in the near term,” he said. “Canadians are still working, and as long as they’re still working, they will pay their mortgages and their credit cards and their auto loans.”
He said banks — like insurance companies, energy providers and communication services — have great track records as dividend payers, with steady dividend growth and reasonable payout ratios.
In the insurance space, he likes Toronto-based Intact Financial Corp., which has pricing power that allows it to offset inflationary pressures. While the dividend yield, at 2.1%, is not as high as some might like, he described it as a quality compounder.
“They have increased their dividend every single year since being spun out of ING in 2005,” he said. “We see the trend in dividend growth continuing, and we think that’ll be a real value driver for the stock.”
Johal said the low interest rate environment of the previous decade was challenging for companies that underwrite contracts based on interest-rate assumptions.
“Higher interest rates generally will be a tailwind for insurance companies going forward,” he said.
In communications services, he likes Vancouver-based Telus Corp., which offers “a healthy 4.9% dividend yield” that could go to 7% over the next three years.
“We see a very favourable risk-reward profile in Telus,” he said. “We expect the company to continue taking market share in both wireless and internet, particularly as its main competitor — Shaw in the West — will be undergoing lengthy integration after being acquired by Rogers.”
In the energy space, he likes Calgary-based TC Energy Corp., a strong player in an industry that has been underappreciated in recent years.
“We think the world is short energy, and the supply side has been constrained as the industry has really been starved of capital over the last six to seven years,” he said.
He said TC’s stock is depressed despite a long history of dividend growth.
“It has major growth projects coming on, which it is financing in the near term. So, the cash flows are going to growth projects,” he said. “We think there’s value there.”
Overall, he said, dividend stocks are a solid investment play. And while returns from dividend stocks dipped from 2018 to 2021 when growth stocks fared better, he sees better returns coming.
“Since 1956, dividends have represented 55% of the total return in the Canadian market,” he said. “We see dividends as a component of total return, coming back to at least historical averages of half of total return going forward.”
This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.