Fund manager Ryan Bushell’s recent dividend stock investing moves include the tripling of his exposure to renewable energy stocks
Ryan Bushell | October 19, 2020 | SmallCapPower: The COVID-19 pandemic has brought about seismic change on a global scale in less than a year. From a financial markets perspective we appear to have weathered the storm incredibly well, given the MSCI World Equity Index is up marginally on the year. If you dig below the surface though, you see a wide disparity of returns between sectors and asset classes, significant amounts of leveraged speculative trading, and unprecedented sums money being printed by central banks in an effort to stabilize the crisis.
When considering the circumstances above, here are the trends that I am focused on for the enduring health of our dividend-focused portfolios in the medium to longer-term:
- Governments are flush with newly-printed cash and looking to stimulate their respective economies. Infrastructure spending is a logical outcome.
- Investor attention on ESG (Environmental Social and Governance) issues is increasing at a rapid rate, such that companies within the preferred ESG sectors are achieving premium valuations and a lower cost of capital via increased investment
- The electorate is increasingly concerned with climate change and is looking for green(er) energy sources
- Electricity demand is poised to grow substantially given the fastest-growing consumers of electricity are cloud computing (servers) and electric transportation (cars/trucks/buses)
- Technology shares appear overvalued. The pandemic and a resurgence of retail investors have prolonged an already extended tech rally into extra innings and record concentration levels.
- Canadian dividend payers with a cross border infrastructure focus are likely overlooked after years of TSX underperformance driven by our heavily-weighted banks and energy producers
I believe a wave of infrastructure spending is coming in North America that will have a particular focus on reshaping and expanding the electricity grid. We need more power, we want cleaner power and we have people that need work. Renewables are likely to see the most growth, however natural gas will remain an important part of the energy mix given the intermittent nature of renewable generation and the physical constraints of battery storage/production. Natural gas will also be important abroad to transition away from coal, which still comprises over 25% of the world’s total energy usage.
Given my view, I have made the following changes to our portfolios over the past six months (see charts below for a detailed portfolio breakdown):
- Decreased financial services weighting from ~25% to ~20% as the interest rate environment over the next 5-10 years is unlikely to be conducive to outsized growth
- Tripled renewable power equity exposure from ~4% to ~12% with the addition of Brookfield Renewable and Algonquin Power & Utilities Corp. (TSX:AQN) to our existing Northland Power Inc. (TSX: NPI) position.
- Holding/Adding to natural gas infrastructure providers including Altagas, Pembina Pipeline Corporation (TSX:PPL) and TC Energy Corporation (TSX:TRP) through this period of weakness
- Added commodity exposure to have more emphasis on a falling U.S .dollar by adding a small position in Barrick Gold
Portfolios have held up admirably in 2020 so far, all things considered. More importantly, portfolio dividend income continues to accumulate uninterrupted. In the immediate term, we need to brace for potential downside. Any one of the host of uncertainties related to the economy, pandemic, or election could flare up and spook leveraged investors with concentrated positions in richly-valued technology stocks. In the medium to longer-term I am more concerned about a melt up in stock prices given equities are priced in dollars and dollars are at risk being rapidly devalued by money printing at an increasing pace. My only priority is my clients’ long-term financial health. In my opinion, infrastructure assets offer the best combination of protection and opportunity given all the uncertainty we are dealing with at present.
Note: Yellow bars denote infrastructure investments of various kinds which make up more than half of the assets in the equity portfolio with emphasis on power generation and distribution.
Note: Despite having nearly all our companies domiciled and listed in Canada more than half of their revenues come from outside the country.
Note: Our portfolio dividend income yield is more than 5%, offering significant protection and an attractive return profile when compared with bonds and broad market indexes
Ryan Bushell is President and Portfolio Manager of Newhaven Asset Management Inc., where he focuses on meeting the needs of his individual clients. He has been a regular guest on several BNN Bloomberg programs, including Market Call, since 2011 and is a frequent contributor to the Globe and Mail, Toronto Star, Reuters and Bloomberg. He can be reached at firstname.lastname@example.org
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