It’s never a good idea to let yield drive your investment decision — especially now.

Focus on overall commitment to growth path

One of the most important lessons I’ve learned in my years as an active market participant and a portfolio manager is to never let yield drive the construction of one’s investment portfolio.

That said, falling interest rates have created a real challenge for those living off of the income generated from their retirement savings, leaving many with little choice but to on-board excessive risk into their portfolios. This includes shifting entirely to dividend stocks or, worse, private and illiquid mortgage pools.

Unfortunately, the outlook for yield-hungry investors isn’t a favourable one, with interest rates expected to continue to remain at or below record lows while dividend cuts are only just getting started.

According to Howard Silverblatt, a senior index analyst for S&P Dow Jones Indices, 16 companies in the S&P 500 have cut their dividends so far, with 31 suspensions since mid-March. Among the notable suspensions are Boeing, Delta Air Lines, Walt Disney, Ford Motor, General Motors and Weyerhaeuser.

Outside of the U.S., Royal Dutch Shell cut its dividend for the first time since the Second World War and Suncor Energy not only slashed its dividend by 55 per cent but also reduced its capital program.

In the private residential-mortgage market, record levels of unemployment have forced many Canadians to defer their mortgage payments and time will tell if asset values ultimately start to suffer. DBRS Morningstar, for example, estimates that even in a “moderate” scenario, home prices in Canada’s largest city would fall by 14 per cent.

Keep this in mind when you encounter those who argue that current loan-tovalue ratios offer a margin of safety to investors.

Now is as important a time as ever to review one’s portfolio to determine how exposed it is to a scenario in which the economy does not rebound as quickly as expected. Those investments focused on defending a dividend and/or interest payment could be most severely affected.

This brings to mind a quote that I often like to use from Jeremy Irons in the movie Margin Call: “There are three ways to make a living in this business: be first, be smarter, or cheat. Well, I don’t cheat. And although I like to think we have some smart people here, it sure is a hell of a lot easier to just be first.” Therefore, look for those who react quickly to adversity such as cutting a dividend, reallocating the cash flow towards preserving the balance sheet and executing a strategic shift.

Interestingly, many of those companies that have already cut or suspended their dividends have seen their share prices not only hold steady but actually rally afterwards. Disney and GM are both up more than seven per cent while Weyerhaeuser is up nearly nine per cent since their respective announcements.

In the private residential mortgage fund sector, meanwhile, we have not seen any reductions in distributions and many of the net asset values have barely changed. More troubling is that we’ve seen some funds that do not appear to be marking their assets to market touted for their outperformance against public indexes such as the S&P/TSX or S&P 500 as a means to attract more capital. If this is the case for any of your own holdings, perhaps it’s worth hitting that redemption button before everyone else does, and if your investment is gated, ask why the NAV hasn’t been updated.

For those wondering where to reinvest, don’t rule out positioning yourself in higher-growth companies that offer capital gains exposure.

For example, take a look at those companies that instead of paying out dividends have reinvested excess cash flow into growing their companies or transforming their businesses to better serve clients online. Many of these companies have not only weathered the economic storm but are profiting from it.

E-commerce giant Shopify, for example, has seen its share price rocket up by more than 80 per cent this year to a new record high, making it at one point Canada’s most valuable company. The beautiful thing is that instead of buying back stock or paying a dividend like many companies did prior to the meltdown, Shopify hit the market with a US$1.3 billion share offering to reinvest back into their company’s growth.

While this is an extreme example and one in which we think the growth is likely already priced in, perhaps there is a broader lesson in this. If investors change their habits and start to provide support to those companies focused on growing, they will in turn hire more employees and strengthen the economy. These don’t have to be tech companies: pizza maker Papa John’s International has hired more than 12,000 people in the last six weeks alone.

That’s the kind of yield I’m sure most investors will go for.