Long-term dividend investment approach helps offset volatility
The global response to the Covid-19 threat has been likened to a war. It was into a world much like this, coincidentally, that Leon Frazer began offering an investment approach that works just as well in the current pandemic as it did back in 1939 at the outset of World War II. As a Canadian Dividend Equity Manager, I have witnessed the efficacy of this approach play out over time.
Back then, in order to protect the purchasing power of investors it was important to own shares in companies built on a solid foundation, which offered products or services that had staying power over time. This included investing in organizations like financial institutions, utilities and telecommunications. Leon believed these companies were particularly attractive because they paid dividends that grew as the companies themselves grew. During periods of economic uncertainty, they would continue paying their regular dividend, thus providing investors with a steady cash income despite fluctuating share prices. The power of growing dividends over time resulted in both growing income as well as capital appreciation.
Given the way the Covid-19 scenario has progressed globally, we don’t expect the current battle to last much longer than another month or two. In all likelihood, you’ve been homebound much like me, my family and my colleagues. You’re also probably aware of the recent volatility in global markets and with the rapid pull back in equity markets in particular. I hope you also take time to notice that your lights are still on, you still have hot water for your shower, and you can still communicate with the world at the speed of light. The companies that provide these services are typical of those which fall in the solid foundations (mentioned above), and are aligned with the investment philosophy I’m describing. They continue to pay their dividends and, in fact, nearly half of them have already increased their dividend this year.
The dividend philosophy is fairly straightforward. This approach not only identifies companies which manage their business and finances in a way that provides growing dividends, but also focuses on “time in the markets, not market timing.” Attempting to exit the equity markets to avoid weakness and then re-enter it once the worst has passed is, at best, a mugs game. When a bottom is formed, it’s often when pessimism is peaking and actually putting money back in is something few people can do – and certainly those who are avoiding market volatility cannot bring themselves to do. Once there’s a sense that the worst is over, the markets have already responded and you would do well to re-enter the market at the place you left it. What’s missed are all of the dividends that continued to flow to those who remained in. And that’s the best case scenario.
Staying in the market with quality, dividend paying stocks lets you continue to collect dividends and grow your capital in good times and bad. It’s one approach that has worked since 1939, and continues to work today.
Gil Lamothe, Vice President & Senior Portfolio Manager
Leon Frazer & Associates
This article was published in Leon Frazer’s Strategies newsletter. Read the full edition here.