U.S. portfolio manager David Merkel is the founder of Aleph Investments LLC and provides worthwhile market perspective on his website alephblog.com. His recent post argued that income-generating stocks are not good substitutes for fixed income. If this is true, it’s highly inconvenient for investors faced with ultra-low bond yields who need a steady stream of reliable income.
Mr. Merkel’s main point is that dividend-paying stocks are still stocks, with the added risk (relative to bonds) that implies. In his words, “In a scenario where the credit cycle goes bearish, those risky investments will be as risky as common stocks for the duration of the bear market.”
The column emphasizes that equity risks can be mitigated by high-quality balance sheets that provide plenty of security for payouts – Canadian bank stocks come to mind here.
The author believes that investors generally have become too complacent with replacing fixed income with dividend stocks. The belief that actual inflation pressure is now more likely (and in some cases already visible) than at any time since the financial crisis, and yield-paying stocks underperform in rising rate environments, makes the warning all the more timely.
I do believe it’s reasonable for an investor to replace a significant portion of their fixed income weighting with dividend-paying equities. But, Mr. Merkel’s warning is well taken – many investors have been reaching to higher-yield, lower-quality investments to achieve their income yield targets, risking painful losses if bond yields continue to climb. It is a good time to reassess dividend portfolios, rotating to higher quality balance sheets where necessary.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Air Canada (AC-T) Buying Air Canada shares during the pandemic has been a speculative bet based on a number of unknowns. When will the pandemic recede? Will air travel rebound to previous levels? And what role, if any, would the Canadian government play in keeping the cash-burning airline going until better times returned? Now, with clarity on the issue of government financial help, some observers expect that Air Canada is a more appealing stock because the risks associated with its financial health have subsided. David Berman reports.
Also see: Tuesday’s upgrades and downgrades: Analysts react to Air Canada deal
The Rundown
Damage report: Comparing the year-to-date losses for various kinds of bond ETFs
Bonds are getting battered as investors adjust to a rising interest rate outlook, and the results are readily apparent in the exchange-traded funds that many of them use for their fixed income exposure. Rob Carrick surveys the landscape.
Long-term boom for commodity prices seen ahead
A recent pause in commodity prices hasn’t blunted the view from some observers that we are at the beginning of a multiyear commodities supercycle, where demand outpaces supply and prices rise to new heights. David Berman reports.
Evolve applies to launch index ETFs that offset the carbon footprint of stocks
As Canadian companies begin to set targets on how they can help reduce greenhouse gases, Evolve Funds Group Inc. is aiming to launch one of the country’s first investment funds that will offset the carbon footprint of North America’s primary stock indices. Clare O’Hara reports.
Former Vanguard Canada CEO launches service for Canadian retail investors to buy fine wines
After a two-year hiatus from Bay Street, former Vanguard Canada chief executive Atul Tiwari is raising a glass to a new joint venture with British-based Cult Wine Ltd. that will allow retail investors to access fine-wine investing. Clare O’Hara explains all about it.
ETFs for investors with the stomach to invest in bitcoin
It has been long-held advice in the investing world that if you don’t understand something, it’s best not to put money into it. That advice looks to have gone by the wayside when it comes to the gold-rush atmosphere among retail investors for the new and growing crop of bitcoin exchange-traded funds. Paul Brent reports.
How your portfolio could benefit from global dividend ETFs
For income-seeking investors, global-dividend ETFs promise broad diversification, low volatility and above-average yields. They also come with somewhat higher costs and a few tax drawbacks for Canadians, making them less suitable in some portfolios. Mary Gooderham explains why they have recently started resonating with Canadian investors.
Also see: Novelty ETFs focus on life after the pandemic
Others (for subscribers)
Wednesday’s analyst upgrades and downgrades
Wednesday’s Insider Report: Chairman cashes out $4-million from this stock that’s rallied 760% in the past year
Tuesday’s Insider Report: Directors cash out over $10-million from these two stocks
Number Cruncher: Twenty financially strong U.S. companies that consistently boost their dividends
Globe Advisor
Interest in space-related investments takes off with new ETFs
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What’s up in the days ahead
If you think loose monetary policy is driving stocks, Scott Barlow explains why you may want to start thinking differently.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Globe Investor Staff