By Michael Barclay
Curious about the impact of a high-rate environment on dividend investing? Mike Barclay, our Senior Portfolio Manager, is here to dissect the effects of higher interest rates on dividend-paying stocks and uncover potential areas of growth and prosperity.
The Influence of Higher Rates
In 2023, the bout of high-interest rates created stiff competition for the equity income category. While it is indeed commendable that a fixed level of income could be reset upwards in 2023, it is paramount to now ponder over strategies to augment this income in the upcoming year.
The impact of higher rates on companies is contingent on the robustness of their balance sheets. Those likely to be detrimentally affected are companies carrying substantial leverage or those reliant on low rates as a crutch for capital funding.
If the elevated rates endure, it is anticipated that technology and industrials will emerge as the frontrunners of this shift. The resilience of technology firms is bolstered by their tendency to operate with minimal debt on their balance sheets, rendering them impervious to the perils of refinancing in a high-rate environment.
In the industrial sector, companies with exposure to burgeoning markets such as green initiatives and energy efficiency are poised to thrive despite the higher rates, owing to their alignment with thriving market segments.
Shifting Perspectives on Equity Income
Our approach to equity income centers on viewing it as a comprehensive return strategy. Though dividends are undeniably pivotal, comprising approximately 40% of the market return over the last century, it is imperative not to lose sight of the remaining 60% derived from capital appreciation. Thus, an equity income strategy geared towards capital accumulation and a burgeoning income stream assumes paramount importance, irrespective of the prevailing rate environment.
Disclosure
It is significant to note that dividend payments are not guaranteed and may vary over time.
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