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Avoiding the ‘yield trap’

Avoiding the ‘yield trap’

Synchronised global growth along with subdued inflationary pressures continue to provide a positive environment for equities and bonds. However, the revived inflationary threats and the possibility of higher interest rates could erode corporate profitability and lead to further bursts of volatility. In this environment, we favour investment strategies that allow investors to cautiously participate in market upside, either by selecting quality assets or managing portfolios to enhance yield and limit interest rate risk.

Fundamental screening of higher-yielding companies reduced the risk of falling into a yield trap, while also reducing volatility and still capturing decent yield. Investors can benefit from the combination of quality and dividend yield factors through a systematic investment style to capture the excess returns of high-quality stocks over low-quality stocks. Quality companies are less vulnerable to rising interest rates as they usually exhibit low leverage, superior profitability (a company’s ability to generate earnings as compared to its expenses) and lower earnings variability, which suggests they are aptly managed and can quickly adapt to economic changes. BMO Income Leaders ETFs track the MSCI Select Quality Yield Index, which selects the most robust companies according to these three aforementioned fundamental criteria before screening for the top 50% of them according to their dividend yield.

This article was provided by BMO Global Asset Management and does not necessarily reflect the views of Citywire

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