‘Coupon-clipping’ value funds By Colum McKinley | Tuesday, April 26, 2011
Value managers are well known for seeking mispriced assets, but the importance of reinvested, compounding dividends is sometimes overlooked. For the CIBC Canadian Equity Value Fund and the Renaissance Canadian Core Value Fund, we seek out opportunities with the best total return potential. That total return includes both the capital appreciation in the stock price and the accumulated dividends from what has become the new way of clipping coupons. In their own way, embedded in dividend-paying stocks are similar bond-like qualities, which is one of the attributes that makes them so attractive to us as value investors. Quarter after quarter our funds receive regular cash payments – almost certain cash flow. Typically, dividend-paying companies are larger, well-established, stable companies with strong cash flow and no excessive debt. These are also the kind of companies we like to invest in when they reflect value characteristics. Dividend-paying stocks offer a solid foundation for an investment portfolio. You receive a steady stream of income while your investment has the potential to increase in value. The yield of the stock can serve as a safety net beneath your wealth.
Over the long term, history shows us that the benefits of compounding and reinvesting dividends results in outperformance over simple capital appreciation. In fact, as outlined in the chart below, we calculate that two thirds of an investor’s return over the past 50 years has come from reinvested dividends. But while dividends are important, owning the shares of companies that can grow dividends over time holds even more significance. Since 1986, dividend growers have generated a compound annual return of 12.4%, and dividend payers have delivered 10.6%, compared with the 7.1% return from S&P/TSX Composite Index.
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