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Blogs

Equity Income Update

Gordon Scott, CFA

December 02, 2021

Why the current market environment sets up well for dividend growth strategies

Current market is well positioned for dividend growth strategies

There are several factors today that support what we believe could allow for attractive return potential for the CIBC Equity Income strategy going forward. Here, we list the top five:

1. Historically, rising rates and inflation have been positive factors for Equity Income

  • Rising interest rates increase the relative value of dividends
  • Dividend growth stocks have led the market in past rising rate cycles 

2. Dividends could contribute more of the market’s total return in the coming years

  • Dividends have contributed about 40% of total stock market returns since 1930 (price appreciation 60%)1
  • As of October 10, 2021, Bank of America forecasts dividends could account for 100% of stock market returns over the next 10 years.

3. Dividend payers are cheap relative to the market

  • Trading at significant discount to historical relative valuation
  • Strategy price-to-earnings uncharacteristically below S&P 500

4. Income is hard to find

  • Bond yields low with mounting concerns of inflation
  • We believe growing dividends are more important with inflation rising
  • Entering 2020, 61% of S&P 500 company dividend yields were greater than the US 10 Year Treasury
  • Equity Income strategy dividends grew 15% in 2020

5. Companies may favor dividends more than buybacks going forward

  • We believe company capital allocation could move incrementally away from buybacks and toward dividends if the proposed 1% surtax on buybacks becomes law
  • In our view, buybacks make less sense at elevated valuations, which could also tilt corporate decisions toward dividends rather than buybacks

Portfolio performance

 

YTD

1 Yr

3 Yr

5 Yr

10 Yr

SI

CIBC Equity Income [Gross]

28.8%

47.9%

24.1%

20.7%

14.8%

13.3%

CIBC Equity Income [Net]

27.5%

46.5%

22.8%

19.4%

13.6%

12.1%

CIBC Equity Income (Non K-1) [Gross]

28.5%

47.5%

23.1%

20.8%

14.9%

__**

CIBC Equity Income (Non K-1) [Net]

27.2%

46.0%

21.8%

19.5%

13.7%

__**

Russell 1000

23.2%

43.5%

22.0%

19.2%

16.3%

12.0%

Lipper Equity Income 

18.2%

36.0%

13.7%

12.7%

12.0%

9.6%

Large Blend Peers

21.5%

39.3%

18.7%

16.6%

13.9%

10.2%

Since inception figures from 04.01.2003 unless otherwise specified. All performance as of 10.31.2021. *Annualized. **Equity Income (Non K-1) since inception date is as of 10.01.2006 returning 11.5% gross and 10.4% net compared to 11.0%, 9.1% and 8.0% for Russell 1000, Lipper Equity Income and Large Blend Peers for the same time period. Net returns are calculated by subtracting the firm’s highest possible fee of 1.00% from the gross return.


A rising stream of dividends

Gordon Scott, CFA, is an equities portfolio manager for CIBC Private Wealth Management’s Equity Income and Large Cap Growth strategies, with more than 25 years of industry experience.

Equity Income GIPS disclosures and notes

Equity Income (Non K-1) GIPS disclosures and notes