Our Favourite 2024 Investment Theme

It now looks like rates will get cut sooner than previously thought.

This week, the market began to price in the first U.S. rate cut to take place as early as March 20. This time last week, the expectation was for a cut to happen on May 1. Canada will surely cut rates as well, especially because there are 3 million Canadians renewing their mortgage over the next 18 months.

Expectations are for five rate cuts to take place next year (125 basis points in total) south of the border.

Our favourite theme heading into 2024 is to accumulate dividend-paying stocks.

Since the rate hiking cycle began in March 2022, this has been a difficult environment for the dividend-payers. Why take the equity risk on a stock when you can buy a risk-free GIC? For this reason, the prices for dividend-paying stocks have headed south. As these rate hikes reverse, the dividend-payers will recover.

There’s plenty of cash on the sidelines. Income-seekers have juiced up the world of money market funds (these are like cashable GICs) from about $4.5 trillion in early 2022 before the rate hikes began to about $5.7 trillion now. To put that into perspective, the incremental $1.2 trillion is about equal to about 3% of the S&P 500 – certainly enough to move the needle as cash exits money market funds once rates begin to drop next year.

Think back to where you were in November 2007. It was a long time ago and certainly much has changed. Back then, the 10-year U.S. Treasury paid a yield of 4.2% — the same rate it pays today. Yet, many high quality companies (think TC Energy, Scotiabank, and Telus) all pay half the dividend yield today compared to 2007. This is because their Boards have steadily increased each company’s dividend per share along the way over the last sixteen years.

Furthermore, in November 2007, 14% of Canada’s population was over 65 years old. Today, it’s jumped to 20% of the population. Not only is the share of senior citizens much higher today compared to other demographics, but Canada’s population has also grown from 33 million to 40 million people since 2007. Because of this, many more Canadians need income. Dividend payments will only increase in demand going forward.

We’re bullish on the dividend-payers heading into 2024. This is because rates will drop as early as March; many dividend-paying stocks offer double the yield now compared to November 2007 when interest rates were at this level; and one-fifth of Canadians are now senior citizens that require income.