Steve DiGregorio, Portfolio Manager, Canoe Financial

FOCUS: Canadian Dividend Paying Stocks

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MARKET OUTLOOK:

Time to reduce interest rate exposure in your Canadian dividend portfolio.

We have seen very strong returns YTD in the traditional dividend sectors, with Utilities, REITS and Telcos returning 12.6 percent, 15.9 percent and 14.8 percent respectively. These strong returns have been driven by asset value appreciation given the benign rate environment. These sectors are now trading near peak valuations, and are at risk should we begin to see rates tick higher. We are seeing better value in the portion of the dividend yield universe which is “yield + growth”.  As 80 percent of the TSX members pay a dividend, we would recommend investors focus on the companies with higher earnings growth, which could mean a smaller portfolio yield, but less downside in a rising rate environment. In addition, we would be sellers of covered calls to enhance portfolio yield. 

With the TSX and S&P 500 trading relatively in line on forward valuations (~15.7x), we see better earnings growth in Canada, and potential for positive earnings revisions. With many analysts’ price decks using oil assumptions below current prices, this implies the TSX valuation is lower than the S&P.

Top Picks:

Morneau Shepell (MSI.TO)

Ten Peaks Coffee (TPK.TO)

ZCL Composites (ZCL.TO)

Past Picks:  September 11, 2015

Restaurant Brands International (QSR.TO)

• Then: $49.50
• Now: $54.69
• Return: +10.48%
• TR: +11.72%

Manulife Financial (MFC.TO)

• Then: $20.35
• Now: $19.52
• Return: -4.08%
• TR: -1.31%

Brookfield Canada Office Properties (BOX_u.TO)

• Then: $24.71
• Now: $28.95
• Return: +17.16%
• TR: +28.16%

Total Return Average: +12.86

Website: www.canoefinancial.com