INVESTORS HAVE FALLEN IN LOVE

with dividends. And rightly so,since dividends have historicallyaccounted for a substantialamount of total return. But likethe old Waylon Jennings song,investors may be “looking for lovein all the wrong places.”

And while we continue tobelieve that stocks of high-qualitybusinesses with above-averageyields will perform well, we cau-tion investors that some tradition-al areas of dividend yield havebecome expensive. As valueinvestors we are always in the pur-suit of yield, but not at any price!

It is important not to overpay forthe underlying business.

The CIBC Canadian EquityValue Fund and the RenaissanceCanadian Core Value Fundsearch the market for the bestinvestment opportunities with thehighest total return potential.

For us, total return includesboth share price appreciation andthe accumulated dividends. Morethan ever, we believe that a portfo-lio anchored with value investingand quality dividends will outper-form the market in today's volatileenvironment.

Dividends have earned a reputa-tion as key drivers of equityreturns. Dividend-paying stockshave a history of outperformingnon-dividend paying companiesand the market.

Also, investing in businesses

that regularly raise their dividendsover time expand their leadership.From December 1986 to June2012, companies that increasedtheir dividends generated a com-pound annual return of 11.9, whilecompanies that did not returned10.0 per cent.

However, both outperformedthe S&P/TSX Composite Indexreturn of 6.2 per cent. In contrast,companies with no dividendsdelivered a compounded return ofa meagre 0.3 per cent.

The Canadian banks are a pow-erful example of the benefits ofdividends. Over the last 20 years,banks have expanded their earn-ings at a compound annual growthrate (CAGR) of 9.1 per cent, wellin excess of the 4.1 per centgrowth experienced by the averagecompany in the S&P/TSX Com-posite Index.

The strong compounding ofearnings and cash flows consis-tently generated excess capitalthat banks were able to return toshareholders in the form of sharebuybacks and dividends. Over thelast 20 years, dividends at thebanks have grown at a CAGR of9.9 per cent, compared to 5.3 percent for the S&P/TSX CompositeIndex constituents.

During that time, the banksubindex generated a compoundannual total return of 10.4 percent compared to the S&P/TSXComposite Index's return of 6.4per cent.

CIBC Asset Management finan-

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VALUE INVESTOR

Investors’ love affair with dividends can be costly. Instead, combineconsistent cash flows with long-term growth for...

TOTALRETURNS

Colum McKinley, CFA

Colum McKinley, CFA, isVice-President, CanadianEquities at CIBC GlobalAsset Management and isthe manager of the CIBCCanadian Equity ValueFund and the RenaissanceCanadian Core Value Fund.

cial analyst Owen Ko believes thatthe bank's long-term dividendgrowth story remains intact.

Over the long term, the uniquenature of the Canadian bankingindustry – coupled with strongcost management, high capitalpositions, and solid internal capi-tal generation – bodes well forequity investors.

We expect the banks to continuemaintaining their legacy as strongdividend growers. Our value fundscontinue to overweight the sectorwith favoured positions in RoyalBank (TSX-RY, $56.85), TDBank (TSX-TD, $81.80), CIBC(TSX-CM, $76.95), and Bank ofMontreal (TSX-BMO, $58.40).

We believe that it is importantto consider the potential totalreturn of an investment. We con-tinue to push for an above-averageyield in our value funds, whileensuring we buy good businessesthat are trading below their histori-cal long-term average valuation.

Our internal research teamworks diligently to identify the bestrisk/reward opportunities. Theirwork identifies situations whereinvestors are over-paying for yieldand may potentially be exposingthemselves to capital losses.

As investors began looking foralternatives to fixed income in thislow interest rate environment, tra-ditional areas of dividend yieldexperienced significant demand.Consequently, sectors such as Util-

ities and REITs enjoyed stronginterest from investors.

From December 2005 to June30, 2012, the REIT and Utilitiessub-indices generated a compoundannual total return of 9.9 per centand 5.7 per cent, respectively. Incomparison, the S&P/TSX Com-posite Index generated a totalreturn of 3.2 per cent over the sameperiod. As a result of the strongprice performance, the valuation ofthese traditional yield investmentshas expanded dramatically abovehistorical norms.

The recent outperformance ofthese traditional sectors haspushed their valuations higher.Utilities now trade 15 per centhigher than their long-term aver-age, while REITs are currentlytrading at an approximately 22 percent premium to historical aver-ages. Investors have been rewardedfor owning these sectors.

What’s absent is a correspond-ing increase in the earnings ofthese businesses; their stock valua-tions have expanded beyond typi-cal levels. Financial markets, onthe other hand, have a tendency torevert to the mean in the long-term. Above-average valuationsare never sustained indefinitely.

As a source of yield, the contrastbetween the banks and the REITs isstriking. The yield on the REIT sec-tor is actually below that of thebanks. While REITs trade at a valu-ation premium to their historical

average, banks are currently tradingat a discount to normal levels.

Over time, the compoundingand reinvesting of dividends con-tributes to wealth creation. CIBCGlobal Asset Management's valuefunds continue to demonstrate afocus on dividends through ourfund’s holdings. As of August 30,2012, 39 of the Renaissance Cana-dian Core Value Fund’s 40 Canadi-an holdings paid a dividend.

The combination of consistentcash flows from dividends anddisciplined value investing – buy-ing attractive businesses whenthey are temporarily unloved –will contribute to strong invest-ment results over time.

We encourage investors to con-tinue to seek yield in the low-inter-est-rate environment, but not at anycost. A total return approach,including returns from both divi-dends and capital appreciation,will help investors to avoid anexpensive love affair. ▼

The views expressed in this article are the personal views of the

author and should not be taken as the views of CIBC Global Asset

Management Inc. or Canadian Imperial Bank of Commerce

(CIBC). This document is provided for general informational pur-

poses only and does not constitute investment advice nor does it

constitute an offer or solicitation to buy or sell any securities

referred to. Individual circumstances and current events are critical

to sound investment planning; anyone wishing to act on this article

should consult with his or her advisors. The information contained

in this document has been obtained from sources believed to be

reliable and is believed to be accurate at the time of publishing, but

we do not represent that it is accurate or complete and it should not

be relied upon as such. All opinions and estimates expressed in this

document are as of the date of publication unless otherwise indicat-

ed, and are subject to change. CIBC Global Asset Management Inc.

operates under the brand name of CIBC Asset Management and is

a member of the CIBC Group of Companies.

© Copyright 2012 by MPL Communications Inc., Reproduced by permission of The MoneyLetter, 133 Richmond St. W., Toronto, ON M5H 3M8

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