An all-weather approach

Since the start of 2022, fears of recession, rising interest rates, high inflation, supply chain disruption and ongoing geopolitical conflict have unsettled financial markets, prompting widespread selling and volatility in the markets. With all the negative headlines recently, we have been getting questions about how we are positioning the portfolio in the current environment and what helps us stay calm in the face of uncertainty.

For our Guardian Global Dividend Growth strategy, at i³ Investments¹, we always look for high-quality companies that we believe can provide sustained dividend growth, have stable earnings, solid fundamentals and strong opportunities for profit and growth. We believe that investing in companies with consistent and growing dividends can provide core building blocks to grow capital while managing risk over the long term.

In the current environment, with inflation, rising interest rates and slowing growth and earnings expectations, the case for owning, dividend-paying companies with consistent earnings growth, high-quality dividend payouts and cash flow visibility has rarely seemed stronger. We believe that companies like these—that are typically leaders in their sectors, with strong balance sheets, low debt, stable revenues and economic moats—are best positioned to sustain the deteriorating market conditions.

Why dividend growth matters
We believe a company’s ability to provide sustainable dividend growth is one of the cornerstones of wealth building, and it becomes even more important during inflationary periods and slowing growth environments. A steadily growing dividend is often a sign of a company’s durability, stability, and confidence in its underlying business. These are companies with pricing power that can protect their profit margins by passing those costs along to customers, such as Costco, Johnson & Johnson and Microsoft. These are companies with durable competitive advantages and strong brand recognition like McDonald’s and Nestlé. These are companies with stable earnings and strong balance sheets, with a commitment to return cash to shareholders.

We center our approach on finding resilient companies that can serve as the core building blocks of wealth creation throughout market cycles; companies that exhibit strong dividend growth, a quality payout and sustainable cash flow growth (often we refer to these attributes as Growth, Payout, and Sustainability or GPS). We believe that:

• Dividend growth is a significant factor for long-term returns and depends on consistent earnings growth
• A quality payout reduces volatility in share price movements
• Robust companies emphasize sustainable cash flow growth resulting in a low probability of dividend cuts

Needless to say, not all dividends are created equal, and that is especially true in the current inflationary and rising interest rate environment. A high-yielding company may look initially attractive, but they are often highly leveraged, with high payout ratios that offer little room for dividend increases and, in the first instance when things get rough, these dividends may even get cut.

This is why, rather than investing in companies based on yield alone, our strategy focuses on companies that we believe have the potential for strong dividend growth, which we call “dividend growers”, and companies that have an attractive, quality payout, which we call quality “dividend payers”. The tables below show examples of each in our Guardian Global Dividend Growth strategy and why we think they will continue to exhibit strong dividend and cash flow growth:

Examples of Dividend Growers in the Strategy

*As at June 30, 2022

 
Examples of Dividend Payers in the Strategy

*As at June 30, 2022

In a world of slowing growth and heightened volatility in the markets, we believe that companies such as those we listed above, with strong GPS attributes, are well positioned to be resilient and weather the market turbulence. We constantly aim to build a diversified portfolio of companies with strong GPS attributes that can deliver growth on the upside, while also protecting against inflation, rising interest rates and global growth slowdown, which are heightened concerns for investors right now.

Concerns about inflation
Our aim is to invest in a portfolio of companies that can continue to grow dividends in a sustained fashion. In an inflationary environment, this often means looking for companies that can pass on some of the higher costs to the consumer. Companies like Costco, which can pass on inflationary pressures to the consumer through price increases, maintain strong margins and continue to do well in an inflationary environment. Our exposure to the Energy sector is another area that can mitigate some of the inflationary pressures. Overall, we believe that the anticipated dividend stability and potential growth can provide an effective inflation hedge.

Rising interest rates
There are two areas in the equity market where we currently see the most interest rate sensitivity: in the low-yielding, high-growth stocks with low near-term cash flow visibility, as interest rates impact their long-term growth projections of cash flows; and in the high-yielding bond proxy equities. As our portfolio does not invest in these types of companies, we believe that it is well-protected in a rising interest rate environment. We aim to invest in companies with quality earnings growth, rising cash flows and low cost of borrowing, which makes them less sensitive to interest rate moves. The portfolio is naturally geared towards companies where the certainty and visibility of cash flows are paramount. It is also well diversified across sectors, which we believe is key in reducing the interest rate sensitivity of the portfolio.

Growth and earnings deterioration
With evolving monetary policies, rising interest rates and valuations under pressure, we believe earnings will be critical to supporting equities and generating further gains. Against this backdrop, we believe focusing on our AI model predictions* for earnings growth and dividend growth will be even more critical. Our machine learning algorithms aim to forecast earnings and dividend growth and the probability of earnings and dividend cuts one year forward. We believe that this enables us to not only find the companies that are likely to be resilient in the slowing growth environment and continue to grow their earnings and dividends despite the headwinds, but also to avoid those companies that are likely to see earnings deterioration and dividend cuts, which is most crucial to dividend income seekers.

A ‘sleep well at night’ approach
We believe the portfolio consists of high-quality companies with strong fundamentals and are confident in the portfolio’s future prospects. Growth, Payout and Sustainability have always been our focus. Our approach does not look at equities by style or size, but by their ability to grow earnings and sustain a credible dividend payout. We believe focusing on companies with these types of attributes leads to strong risk-adjusted returns and reduced volatility.

Having navigated multiple volatility regimes and market cycles, we believe that our focus on quality companies with strong GPS characteristics delivers a ‘sleep well at night’ approach that aims to outperform the market through time with less volatility: an all-weather approach that can be used as core building blocks for wealth building in investors’ portfolios.

1:i³ Investments^TM Team is a portfolio management team with Guardian Capital LP, a registered portfolio manager.

*Based on a multi-factor algorithm incorporated into a proprietary analytics model. The application of a model is hypothetical and the simulated results are subject to inherent limitations.

This commentary is for general informational purposes only and does not constitute investment, legal, accounting, tax advice or a recommendation to buy, sell or hold a security or be considered an offer or solicitation to deal in any product or security mentioned herein. It is only intended for the audience to whom it has been distributed and may not be reproduced or redistributed without the consent of Guardian Capital LP.

The opinions expressed are as of the published date and are subject to change without notice. Assumptions, opinions and estimates are provided for illustrative purposes only and are subject to significant limitations. Reliance upon this information is at the sole discretion of the reader. This document includes information concerning financial markets that was developed at a particular point in time. This information is subject to change at any time, without notice, and without update. This commentary may also include forward looking statements concerning anticipated results, circumstances, and expectations regarding future events. Forward-looking statements require assumptions to be made and are, therefore, subject to inherent risks and uncertainties. There is significant risk that predictions and other forward-looking statements will not prove to be accurate. Investing involves risk. Equity markets are volatile and will increase and decrease in response to economic, political, regulatory and other developments. Investments in foreign securities involve certain risks that differ from the risks of investing in domestic securities. Adverse political, economic, social or other conditions in a foreign country may make the stocks of that country difficult or impossible to sell. It is more difficult to obtain reliable information about some foreign securities. The costs of investing in some foreign markets may be higher than investing in domestic markets. Investments in foreign securities also are subject to currency fluctuations. The risks and potential rewards are usually greater for small companies and companies located in emerging markets. Bond markets and fixed-income securities are sensitive to interest rate movements. Inflation, credit and default risks are all associated with fixed income securities. Certain information contained in this document has been obtained from external parties, which we believe to be reliable, however we cannot guarantee its accuracy.

Investment strategies using quantitative models may perform differently than expected as a result of, among other things, the factors used in the models, the weight placed on each factor, changes from the factors’ historical trends and technical issues in the construction and implementation of the models. Please consider these and other factors carefully and not place undue reliance on modeled information. There is no guarantee that the use of the quantitative model will result in effective investment decisions.

There can be no assurance that the portfolio will continue to hold the same position in the companies referenced here, and the portfolio may change any position at any time. The securities discussed do not represent an account’s entire portfolio, and in aggregate, may represent only a small percentage of an account’s portfolio holdings. It should not be assumed that any of the securities discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable, or will equal the investment performance of the securities discussed. There can be no assurance that the Fund will achieve its investment objective.

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