If Interest rates rise, will Dividends go up or decline? No certainties but the probability are that some dividends might… – October 28, 2021
As most investors know the central banks have no means to stop inflation that’s related to shortages of real goods. However, central banks can instill confidence in the marketplace by encouraging people to invest in safe investments by raising interest rates. Canada similar to other nations in the world is having supply-related challenges and Canada’s current federal government is out of touch with reality.
Central banks are supposed to be independent of their governments, but during the pandemic, the Bank of Canada(BoC) bought almost all of the Federal Governments’ debt. There are serious economic consequences to doing that, inflation of course being one of them but most importantly MALINVESTMENT being the most problematic.
When any bank has toxic assets it wants to rid itself of them and this appears to be the phase the BoC could be headed for. One of the reasons most central banks follow the lead of the Federal Reserve is to avoid having their currency getting too strong against the U.S dollar because most countries are often reliant on the U.S consumer, but when the U.S Consumer is not spending like it once did, there is little to no incentive to mark your currency down to the greenback.
Because America doesn’t manufacture like it once did, during a U.S economic downturn, countries and businesses might take a novel approach to economics. If Americans can’t spend on certain goods, and that’s Canada’s largest trading partner, well how can Canada attract new investment? One of the ways is to raise interest rates, now if interest rates rise, asset prices might crash, but to the surprise of many, dividends might actually rise.
Why dividends might rise while the value of stock declines is that most dividends compete with the market, and if the name of the game is asset appreciation, most investors will be investing purely to see the price of a stock go up, well if the game returns back to normal and investors begin investing for CASHFLOW, participants in the stock MARKET, will do what they deem necessary to attract LONG TERM investment.
If private companies have to compete with the central banks for capital, so be it, many will take the risk because you have to understand cashflows to where it’s treated best and that attention of being a dividend-paying stock is enough to attract the right type of investment for a large company. Now, as we know, there are companies that pay dividends and have no value, those companies will, of course, crash and suffer the most losses if central banks push rates up, but the central banks have to do their part in keeping the WEALTH EFFECT alive and well.
In Canada, if things left in the economy, the people with non-cash flow producing assets will be the first ones to feel the wrath of the market because once that bear jumps out the window, that’s bankruptcy for a large number of people, but in Canada, what separates Canada from other nations is our lending practices, people who own their homes and have fixed mortgages, need not worth about normal interest rates, but the speculators who bought assets with the expectation that the price of that asset would rise in value indefinitely, well during economic downturns, it’s unlikely the Bank of Canada will care much for those people, nor will politicians.
On the flip side, this period if it does happen would be a great time for prudent investors and prudent savers. It would be a cleansing if you will of the economy, responsible investing would be forced back into the marketplace and some normalcy might return to the lives of people. But to stay on topic, dividends have been paying bare minimums because most investors in this marketplace are buying to flip stocks, so the thinking has been why pay a high dividend if the central banks are signaling that cash is trash?
Raising interest rates is a signal that cash is not trash and is indeed worth preserving and investing for cash flow. So don’t be so quick to pull all of your money out of the stock market even if interest rates are normalized.
Interesting times ahead