Daily Commentary

MarketMinder’s View: This piece mentions several investment funds, and as always, MarketMinder doesn’t make individual security recommendations—we bring you this for the broader theme only. That theme: When looking at funds and stocks in general, basing decisions on yield alone won’t get you far. There is nothing magical about high-dividend stocks. Sometimes they lead, sometimes they lag, usually based on the style and sector biases in the high-dividend world (they tend to be value-oriented and heavy on Real Estate, Financials, Energy and Utilities). As the article notes, high-dividend funds got hammered in the 2007 – 2009 global financial crisis, due largely to their high Financials exposure. Adding insult to injury, banks broadly scrapped dividends back then. Even in seemingly better times, when considering stocks with yields miles above the market’s average yield, “you should ask a basic question: Why is the yield so high, anyway? Although a moderate dividend can be a sign of robust corporate health, a huge dividend can be a distress signal. A dividend four or five times greater than that of the overall market isn’t a green light; it’s a red flag.” And potentially a costly one, considering dividends get taxed as ordinary income. In our view, this is especially cruel when you consider that dividends are a return of capital (the dividend reduces the stock price equivalently, so this is literally the case). It is not a return on capital, so you are essentially getting money back that you have already paid income taxes on … and then paying income taxes on it again. We aren’t anti-dividend, but we don’t think relying on dividends is wise or even necessary for cash flow. Instead, focus on total return and harvest what we call home-grown dividends. As the article notes, “Sell a portion of your holding each month, in amounts that will generate the income you seek and that should be taxable at low long-term capital-gains rates.”

MarketMinder’s View: Japanese consumer spending rose 0.1% y/y in July but missed expectations for 1.2%. Month-over-month, spending dropped -1.7%, far worse than the expected -0.2%. Analysts and the Bank of Japan are optimistic that the data will improve from here, as real wages rose following the springtime labor negotiations, but time will tell, and seasonal bonuses were also a factor in pay growth. Those are a one-time deal. Overall, we think this report illustrates Japan’s domestic demand headwinds. They are well-known—not a new, shocking negative for Japanese stocks—but they illustrate why multinationals are likely better positioned, especially with their ability to profit off the weak yen.

MarketMinder’s View: All in all, this isn’t an awful report despite Canadian unemployment’s titular jump to 6.6%. The country added 22,100 jobs, while the unemployment rate rose because a whopping 82,500 folks joined the workforce. We would agree with the characterization of this as showing “slack” in the labor market, as supply of workers rose faster than demand, but that is different from outright weakness caused by a faltering economy that brings job losses. As economic growth continues, it should absorb more workers. After all, labor market trends follow broader economic trends, not the other way around. Now, this piece spends many pixels speculating over what this report will mean for the Bank of Canada’s next interest rate decision, which arrives in late October. In our view, this is unknowable. But whether they hold, cut a little or a little more, Canadian growth depends on more than the level and direction of short rates, and GDP is doing ok at current rates.