Ryan Bushell, president and portfolio manager, Newhaven Asset Management 

FOCUS: Canadian dividend stocks

MARKET OUTLOOK:

I expect volatility for equities broadly, especially in the first half of 2022, but I remain cautiously optimistic on the prospect of another solid year for our portfolios. Central banks, led by the U.S. Federal Reserve, have turned more cautious on inflation and are likely to increase interest rates and reduce other stimulus measures earlier in 2022 than most expected. These actions are likely to be front-end loaded unless economic growth and inflation surpass expectations.  The question will be: How markets react to this anticipated paradigm shift?  So far, we are seeing an orderly rebalance from richly valued growth companies toward more reasonably valued companies without much overall volatility. There is potential for a broader market downturn in the first half of 2022, much the same as late 2018, when economic growth was slowing, and interest rates were rising.  The pandemic is likely to be a swing factor for policy in 2022.  If Omicron restrictions expand in both scope and timeline then the global economy will slow and interest rate increases may be delayed, pleasing most investors. However, if Omicron cases quickly peak and recede with widespread immunity from both increased transmission and vaccinations, then economic growth could reignite.  Another upswing in economic growth and resulting inflation in mid-2022 is likely to cause central banks to tighten monetary conditions quicker and more forcefully than the market would like. This creates downside potential for stocks in general and especially for the more speculative (overvalued) areas of the market.

TOP PICKS:

Brookfield Renewable Partners (BEP-U TSX) – Last bought at $41.00

Brookfield Renewable Partners is a premium investment in the renewables space. Renewables companies traded down in 2021 after a very positive 2020 and have sold off even more in 2022 so far as money seems to be flowing into companies with leverage to rising oil prices.  Longer-term, Brookfield Renewable has a solid base of assets combined with access to capital to fund growth. The 3.75 per cent dividend yield is poised to grow consistently in the years ahead.

Aecon (ARE TSX) – Last bought at $16.50

Aecon has corrected 25 per cent since September on very little news. Recently they announced their first project award in the United States which bodes well for future backlog growth. The company has done an excellent job growing backlog, earnings and dividends on a consistent basis for the last five years despite a challenging backdrop. With a 4.2 per cent dividend yield we can afford to be patient as fundamental strength will eventually be recognized by more investors.

Freehold Royalties (FRU TSX) – Last bought at $12.50

Freehold Royalties remains inexpensive despite significant appreciation in the past year. Although the stock was up more than 100 per cent last year the dividend grew 400 per cent and sits ~15 per cent above its pre-pandemic level. The current dividend remains attractive with a 5.7 yield and there is likely another increase in store for 2022.  Oil prices are likely to be volatile this year but for those with no exposure, Freehold is a relatively safer way to enter the sector given their low capital expenditure profile, low leverage, and significant dividend.

PAST PICKS: January 6, 2021

Enbridge (ENB TSX)

• Then: $41.77
• Now: $52.35
• Return: 25%
• Total Return: 33%

Shaw Communications (SJR/B TSX)

• Then: $22.66
• Now: $37.20
• Return: 64%
• Total Return: 70%

Algonquin Power (AQN TSX)

• Then: $21.02
• Now: $17.27
• Return: -18%
• Total Return: -14%

Total Return Average: 30%