Time to overweight stocks

The time is right for overweighting equities, according to Laurentian Bank Securities.

Bonds vs. Stocks

The bond market is currently characterized by rates that are slightly on the rise, after having posted historic lows. “The return on bonds remains purely mathematical,” explains Sylvain Ratelle, vice-president and strategist with Laurentian Bank Securities. “It depends directly on interest rates, which are rising at a very slow pace.”

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While more or less short-term fixed income securities are under-performing, stock markets are showing an upward trend. Certain stocks are breaking away from the pack— those listed on the S&P/TSX Canadian Dividend Aristocrats Index (CDA) and their counterparts in the United States.

As indicated in a Toronto Stock Exchange document, “The S&P/TSX Canadian Dividend Aristocrats Index captures both the sustainable revenue of dividends and the possibility of increasing the value of capital, which are two key factors in the investor’s total return expectations. The Index also offers diversification across all sectors, and it features both growth and value characteristics.”

The stocks that are part of this Index have raised their dividends each year over a period of five consecutive years. “These Indexes outperform the general Indexes, as well as the large majority of mutual funds,” underlines Ratelle.

“In fact, over the past five years, Aristocrats Index stocks generated a return of 12.24%, as compared to 4.80% for the S&P/TSX and 3.71% for the S&P/TSX 60 in Canada. Over the same period, their return in the U.S. was 14.10%. These are high quality stocks that offer regularly increasing dividends. As such, they represent a choice vehicle with a lot of value.”

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By adding a fundamental filter to these stocks aimed at identifying those that offer particular stability and create value for shareholders, the return is even more substantial at 18.62%.

Geographic and Sectoral Distribution

The distribution of assets by geographic markets does not have the same consonance as it did during the previous decade. Assessments are reasonable, and no particular market is booming. While the price-to-earnings ratio is more or less the same in Canada and the U.S. at X13, it is at X11 in Europe and X8 in China. In addition, although other markets may represent savings, it is always essential to take risk factors into account.

For its part, sectoral distribution is no longer as important in and of itself as it was because of the broad range of diversified products available on the market. “For example,” concludes Ratelle, “the CDA Index is composed of companies operating in all industrial sectors. Taking the cyclical nature of each into account, every stock must be evaluated on its own merit.”

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Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.