Full episode: Market Call for Friday, September 25, 2020
Ryan Bushell, president and portfolio manager at Newhaven Asset Management
FOCUS: Canadian dividend stocks
Markets have stumbled as expected early this fall as the news cycle surrounding the economy, COVID- 19 and the U.S. election have all simultaneously turned negative. Supplementary income programs offered by governments are tapering while the economic recovery is losing steam, the dreaded second COVID wave appears to be arriving on schedule and the U.S. political situation continues to escalate. From a big-picture perspective, the current environment resembles the late 1930s, where monetary policy had been easy for several years until a unifying event (WW2) elevated fiscal spending enough to eventually create inflation. Interest rates have been hovering near zero since 2009, but inflation and GDP growth have remained restrained. The COVID-19 pandemic broke many barriers related to fiscal conservatism and it remains to be seen what the long-run implications will be. It is likely that once the pandemic runs its course, governments will spend aggressively to rebuild the economy. Infrastructure spending should be at the top of the list, especially as it relates to clean power; I have allocated one third of my portfolios to a combination of renewable power companies, utilities and other infrastructure investments that will either directly or indirectly participate in this theme and I’m actively looking to further expand these holdings for my clients. In my view, infrastructure-based investments, including renewable power, represent an attractive balance of risk and reward in this very uncertain time, with a dividend yield 4 per cent that can grow steadily over time.
Pembina Pipeline (PPL TSX) Most recent purchase: $29
Shares of Pembina Pipeline were hit hard in recent weeks, losing 25 per cent from their post-March high. Oil and gas prices have remained resilient as energy demand recovers, while shale supply in the U.S. has declined significantly. Pembina’s counterparties are in decent financial shape absent another lasting downdraft in commodity prices, and most of Pembina’s businesses are levered to natural gas and NGLs. The overwhelming majority of Pembina’s cash flow is contracted on a long-term basis and overall energy demand is set to grow. Pembina’s natural gas-focused infrastructure retains value and can support its current dividend well into the future.
Algonquin Power (AQN TSX) Most recent purchase: $18
I have been patiently waiting to buy Algonquin Power over the past few years and the combination of a CEO change and a weak quarter during the pandemic has finally presented the opportunity. Algonquin is one of the few Canadian listed renewable power developers that is not trading at its 52-week high and has significant presence outside Canada. The 4.6 per cent dividend yield is well supported and poised to grow steadily over time. With most of their assets in the U.S., Algonquin is poised to participate in a renewables push over the next couple of decades.
AltaGas Preferred K (ALA-PR-K TSX) Most Recent Purchase: $22
This recommendation is more about this specific class of reset preferred shares as a substitute for cash and/or fixed income. Obviously, I like the parent company as well. This particular AltaGas issue has a floor for the dividend at current levels, but can reset higher every five years if interest rates rise. This is a key difference from most five-year reset preferred shares that can reset higher or lower. The shares are also callable at $25 (a 15 per cent gain from current levels) while paying a significant 5.6 per cent dividend yield. As we saw in March, this asset class can exhibit significant volatility due to illiquidity. However, the 5 per cent spread and favourable tax treatment is worth it for savvy investor.
PAST PICKS: SEP. 19, 2019
Canadian Natural Resources (CNQ TSX)
- Then: $35.92
- Now: $21.83
- Return: -39%
- Total Return: -34%
WPT Industrial REIT (WIR/U TSX)
- Then: $13.74
- Now: $12.52
- Return: -9%
- Total Return: -3%
Pembina Pipeline (PPL TSX)
- Then: $49.38
- Now: $28.13
- Return: -43%
- Total Return: -39%
Total Return Average: -25%