Ryan Bushell, president and portfolio manager, Newhaven Asset Management

FOCUS: Canadian dividend stocks 

MARKET OUTLOOK:

Markets have continued their ascent higher despite the further tightening of monetary policy on both sides of the border. The economy, while stronger than many, including us, expected, has been flashing mixed signals at a time where many have abandoned fear of recession. We remain cautious as the lagged effect of interest rate increases continues to gain momentum alongside inflation that has now passed the easiest comparable period at rates that are still higher than central bank mandates. Additionally, the concentration in the S&P 500 has returned to the extreme levels we saw prior to the 2022 downturn and other negative market events throughout history including the nifty fifty bubble and the internet bubble.

Earnings will be crucial for the go forward of the market from these elevated levels. Conversely, all the attention on technology shares has left some of our favourite Canadian dividend payers at yields not seen since the global financial crisis in 2008. We have banks and telecom companies yielding over six per cent, blue chip pipeline companies yielding over seven per cent and energy producers with generous free cash flow yields in the mid to high teens. After the most recent increase in rates from the Bank of Canada, cash now yields nearly five per cent so there is a plethora of options to earn a solid return with a high degree of safety. This is where we concentrate client portfolios at present, infrastructure, financials, resource producers, cash and other companies with stable businesses and attractive dividend yields. 

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TOP PICKS

TC Energy (TRP TSX)

TC energy yields over seven per cent at current levels and remains the premier natural gas infrastructure provider in North America. With Coastal Gas Link largely behind them and asset sales upcoming the story should quiet down and deliver solid and steady growth. With a 7.2 per cent dividend you are on pace to double your money in 10 years with no share price or dividend growth. This is playing from the “forward tee” in golf terminology and that’s before we look at the backdrop for North American LNG exports to double in the next 10 years and all the infrastructure needed to support that growth.

NFI Group (NFI TSX)

We have struggled along with NFI for the past few years as supply chain issues have hampered production and caused financial stress for the company. We have been purchasing shares all year below $10 as we see the turn in the fortunes of the company ahead. Supply chain pressures are easing, producer cost inflation is easing, equity and debt restructuring is complete and orders remain strong. Additionally one of their main competitors, Novabus owned by Volvo, has completely exited the U.S. market. Although we never like to see a holding endure this type of financial stress, especially as it relates to the dividend, buying more on a high conviction knowledge of the company when most investors are selling is a good recipe for outsized returns down the road. 

Emera (EMA TSX)

Emera is a long-term holding that exhibits low volatility, however, the shares are off ~10 per cent recently as the run in the market has seen investors rotate out of defensive companies. We remain structurally positive on utilities given the supply/demand dynamics for power in the coming decades driven by the desire to lower carbon emissions, population growth, higher air conditioning demand and reshoring of manufacturing activity on this continent. All of these factors are poised to inflect power demand higher at a time when the sources of power are also changing, creating dependable growth for distribution utilities across the continent. With a 5.1 per cent dividend yield and above-average growth in their rate base jurisdictions, we feel Emera is a solid investment at an uncertain time.

PAST PICKS: September 6, 2022

Pembina Pipeline (PPL TSX)

• Then: $45.52
• Now: $40.83
• Return: -10%
• Total Return: -6%

Algonquin Power (AQN TSX)

• Then: $17.88
• Now: $10.66
• Return: -40%
• Total Return: -36%

Aecon (ARE TSX)

• Then: $10.89
• Now: $12.27
• Return: 13%
• Total Return: 20%

Total Return Average: -7%