Zach's Facts & Figures

Who has not heard the above repeated belief? There are some great books that may not have attention grabbing titles or covers, while plenty of flashy books turn out to be terrible reads.

In the stock market, we also shouldn’t judge a company by ‘its cover’. While some widely held beliefs are well-deserved – both positive and negative – we need to think back to first principles to understand the fundamental reasons for this. For example, a CEO or management team that’s ‘well- known’ as a strong capital allocator will attract a premium multiple. Conversely, a management team that does not have a favorable reputation could result in a company trading at a discount to its peers. There are many other factors that go into valuing a company, but whether a management team creates value or not, does carry some weight with investors.

A conventional thought coming into 2023 was to avoid technology stocks which, as the theory goes, see multiple compression in a rising rate environment. Meanwhile, dividend stocks were considered a relatively safe shelter, especially with companies that had exhibited a pattern of dividend growth.

However, that has not played out in 2023 as tech stocks have had a strong recovery, despite bond yields increasing much further than many expected. This has also provided an opportunity for investors to welcome the return of income in instruments such as Money Market Funds, Guaranteed Investment Certificates (GIC’s) and short-term corporate bonds. These now offer competitive yields compared to dividend stocks, with the added benefit of lower short-term volatility.

This has resulted in dividend stocks that previously traded at a 4-5% yield now trade at 6-7% yields, and in some cases even higher. While this may seem like a positive for investors, that is hardly the case. This increase in yield has come largely as a result of share price depreciation. (Yield is calculated as dividend divided by share price) as funds flow out of dividend names to fixed income instruments like those mentioned above.

Conventional wisdom can also create investment opportunities when those beliefs are offside with where a company is trading. One of those general, widely held investor beliefs being tested this year is having a large allocation to dividend stocks. For dividend stocks, the income plays a big part of a company’s total return (Total Return = Share Appreciation + Income).