Keep an eye out for investment opportunities in Canadian equities

In the current environment, investors could benefit from owning companies with low leverage, strong pricing power, good growth characteristics and reasonable valuations. 

Low leverage is advantageous when the cost of debt payments is rising. Strong pricing power ensures companies can pass along inflationary costs to their customers and maintain margins. Growth is important and valued to a greater extent in a slower growth environment. Finally, starting valuations impact future expected returns as companies with long-dated cash flows are worth less when discounted at higher interest rates. A few sectors that stand out with these characteristics are: waste, self-storage, property and casualty insurance, and energy. 

A common type of Canadian equity is stocks that pay dividends to investors. The key with dividend-paying Canadian equity stocks is to examine the sustainability of those dividends — and more importantly, to seek out companies that can consistently grow their dividends over the long term. Unlike fixed income and money market securities, dividend-paying equities have the ability to combat inflation by increasing their dividends over time, in addition to the opportunity for capital gains, all in a tax-efficient offering. Dividend-paying investments tend to be favourable when markets correct or move sideways for an extended period, as the dividends begin to make up a much larger percentage of overall total returns, such as in the example of Canadian bank stocks. Given the outlook for continued market volatility, we would expect the benefit of dividend payments to once again contribute significantly to overall returns. 

A focus on high-quality, growing companies with strong financial positions and sustainable competitive advantages — with the ability to grow their dividends — can be a recipe for long-term success.