Stu Kedwell, managing director, senior portfolio manager and co-head of North American equities at RBC Global Asset Management.The Globe and Mail
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Being a dividend-focused investor may not be as exciting as picking the hottest technology or big pharmaceutical stock, but for money manager Stu Kedwell it’s a stable way to make money over the long term.
“Some might say it’s kind of mundane … but it’s not going to be as volatile as some conventional equity investments,” says Mr. Kedwell, managing director, senior portfolio manager and co-head of North American equities at RBC Global Asset Management in Toronto, who oversees about $36-billion in assets.
The RBC Canadian Dividend Fund, which he co-manages, has returned 7.2 per cent over the past 12 months. Its three-year annualized return was 11.3 per cent and its five-year annualized return was 8.8 per cent. The performance is based on total returns, net of fees, for the Class F version as of Feb. 29.
The fund is 41 per cent financials, 18.5 per cent energy, 15 per cent industrials and the rest in sectors such as consumer staples and discretionary stocks, utilities and real estate. Its top five holdings as of Feb. 29 include Royal Bank of Canada RY-T, Toronto-Dominion Bank TD-T, Canada Pacific Kansas City Ltd. CP-T, Canadian Natural Resources Ltd. CNQ-T and Enbridge Inc. ENB-T.
The Globe spoke to Mr. Kedwell recently about what he has been buying and selling and the Canadian tech stock that got away.
Describe your investment style.
We have a long-term view. We try to understand how businesses will develop over long periods. We’re big believers in what we call “scenario analysis.” We look for quality companies, and with each of those companies we look at the bull case, the base case and the bear case, and understand where the stock sits within those three alternatives.
Rather than trying to predict what will happen, we try to understand what could happen and where the stock sits in relation to those scenarios. For instance, if a stock is near its bear case, we potentially have a lot of upside. A quality company with a good management team will do what’s necessary to realize the base case eventually – and perhaps the bull case. We focus on dividend-paying stocks with a good current yield that we expect will have good dividend growth over time.
Talk about some of the challenges with dividend stocks today and your strategy.
There are different types of dividend stocks: companies with high payout ratios, some have used leverage to drive growth, companies with medium payout ratios and businesses with lower payouts. We tend to have a combination of the last two. We’ve stayed away from stocks with high payout ratios, particularly those whose cash-flow growth will be dented by higher interest charges.
Our goal is to find a current yield on the fund of about 3.5 to 4.5 per cent and dividend growth of 4 to 7 per cent, depending on where we are in the cycle. If you marry those two together, you’ll get a pretty attractive total return over a longer period. Our portfolio has a low turnover, but movement between the names – as opportunities present themselves – can be significant during certain periods.
What have you been buying?
One stock we’ve been adding to is George Weston Ltd. WN-T, which owns a majority stake in Loblaw Cos. Ltd. L-T, and Choice Properties Real Estate Investment Trust CHP-UN-T. Choice Properties may not be a fast-growing real estate entity, but it owns some of the best locations across Canada. We also think Loblaws will continue to grow at a healthy clip, driven in part by its Shoppers Drug Mart and No Frills brands.
We’ve also been buying West Fraser Timber Co. Ltd. WFG-T after almost exiting the stock last fall. The company has a very strong balance sheet and we think it looks pretty interesting as interest rates begin decelerating and housing activity picks up again.
We’ve also been adding to Manulife Financial Corp. MFC-T. We think its recent transaction to reinsure some of the long-term care business was significant, not just to liberate capital for more share buybacks but to signal to the market the strength of the business.
What have you been selling?
Hydro One Ltd. H-T is one stock that we’ve been trimming. While there’s a lot of enthusiasm for electricity and transmission within the utilities sector, Hydro One’s valuation was fairly high. The balance sheet is fantastic, but you can only grow as fast as your rate base.
We also trimmed Thomson Reuters Corp. TRI-T. The stock has done extremely well, and there’s a lot of enthusiasm around artificial intelligence. We still like the business longer term, but decided to take some profits.
Name a stock you wish you owned.
Constellation Software Inc. CSU-T. The stock continues to outperform. Its valuation is based on the existing business and has a premium for its ability to allocate capital at attractive rates. Every time we’ve looked at it, we didn’t want to pay the premium. Yet, the stock continues to accelerate. You have to tip your hat to its management team.
What advice do you have for new investors?
When you witness the stock market’s volatility as a new investor, it’s hard not to believe there are opportunities. I remember feeling the same way when I was starting. I did a lot of transactions. At the end of the year, my advisor sat me down and said, “It doesn’t work this way.” The longer-term outcome in the stock market isn’t nearly as volatile as the day-to-day events. I believe dividend investing is a wonderful way to invest over the long term. It helps to reduce emotions during market ups and downs while investing in stable businesses.
This interview has been edited and condensed.