CN Rail Increases Dividend

Canadian National Railway (CNR) reported that profits increased to $582 million in the fourth quarter despite lower revenues. The railway increased its quarterly dividend to $0.27 per share. This represents an increase of 7% from the previous dividend.

CN Rail has increased its dividend every year since becoming public in 1995.

Metro Raises Dividend

Metro (MRU.a) increased their dividend by 24% on the back of solid Q1 results. Metro's new quarterly dividend is $0.17 per shares. The shares currently yield 1.7%. Metro has increased its dividend for the 15th consecutive year.

Reaching for Yield

Don't let your search for yield blind you to risk

Tom Bradley is president of Steadyhand Investment Funds.

There's no question about it. The defining feature of the capital markets right now is the search for more yield. Individuals are doing it. Institutions are doing it. And new product development is totally focused on it.

I get an e-mail almost every day announcing a new fund with income in the name. I'm trying to convince my partners that we need to come out with a product that has it all – the Steadyhand Enhanced Global High Yield and Growing Dividend Weekly Income Fund, or SEGHYGDWIF for short.

With low-risk securities yielding next to nothing, investors are moving up the risk scale. Instead of a guaranteed investment certificate (GIC) that yields 3%, they're buying Brookfield bonds, BCE preferreds or BMO shares that yield 5 to 6%. This is an asset mix shift that brings with it credit risk – the risk that the issuer of the bond or preferred can't make the payments – and equity risk. Income Trusts, REITs and dividend-paying stocks all have the potential to go down in price.

Holding a diversified portfolio certainly decreases the chance that a default or stock market decline will meaningfully affect long-term returns, but it still brings with it more volatility. For investors in the accumulation phase, volatility is not a risk, but rather an opportunity – when stocks are down, they can buy more. For investors living off their portfolio, however, it's a different matter. Making withdrawals when markets are down means eating into capital, which leaves a smaller asset base to ride back up with and generate future income.

In most cases, “reaching for yield” is perfectly appropriate and works out well, but the expression always makes me uneasy. That's because the risks attached to “reaching” are not always obvious and tend to creep up on investors. If income is flowing and the strategy is working, they don't see the risk. They only know it's there when things stops working. We can go back a few years to when fixed-income investors shifted from bonds to income trusts. They were ecstatic about the extra income until they ran into distribution cuts and abrupt price declines.

Also, when there's a lot of reaching going on, it usually means that high-yielding securities are getting overpriced. Again, the early trust market was an example of this. These securities were getting priced off their yield – the higher the better – with little regard to what the underlying businesses were worth.

As the old saying goes, “More money has been lost reaching for yield than at the point of a gun.” Income-oriented securities are no different than other types of investments. The price has to make sense, no matter how great the need.

First Capital Realty

First Capital Realty (FCR) acquires, manages and develops staple-goods-oriented neighborhood and community shopping centres. It has interests in 182 properties in Canada.

Defensive Retail: First Capital focuses on major urban markets with strong population and economic growth. Management believes that location is the single most important factor in acquiring real estate. First Capital builds critical mass in each target market to generate economies of scale and operating synergies. First Capital  focuses on supermarket and drugstore-anchored neighborhood shopping centers in high-density locations that have barriers to entry. More than 82% of its properties are anchored by supermarkets and/or drugstores. Management believes that these tenants are more resilient to economic cycles and have rental income stability. This strategy has yielded positive results, as First Capital has consistently increased its dividend per share.

Major Tenants Include:

First Capital is a BUY and can be considered a good alternative to RioCan.

Retail REITs

Within the REIT universe in Canada, conservative investors should look at REITs that focus on retail properties such as shopping malls and grocery-anchored shopping plazas. Retail REITs offer stable income derived from the strength of their tenants. The best Retail REITs have properties that are anchored by stores that cater to everyday shopping such as grocery stores. These properties have a steady flow of customers in good times and in bad.

With Real Estate, it is all about

Location, Location, Location.

RioCan’s properties are mainly located within Canada’s six major high growth markets: Toronto (35% of rental revenues), Montreal (11%), Ottawa (9%), Calgary (6%), Vancouver (4%) and Edmonton (3%). RioCan recently began pursuing opportunities in the U.S. RioCan is the largest REIT in Canada by market cap.

First Capital generates approximately 90% of its revenues in Canada’s largest cities. Ontario makes up over 45% of First Capital’s portfolio, while the Greater Toronto Area alone accounts for 27% of the portfolio. The Montreal area represents 18%, and Calgary/Edmonton/Red Deer account for 20%. Technically, not a REIT, First Capital is structured as a Real Estate Operating Company (REOC).

Calloway is often dubbed the "Wal-Mart REIT" due to the fact that Wal-Mart anchors 76% of their locations. The portfolio has exposure to all ten provinces, while its largest concentrations, as measured by gross revenue, are in Ontario (59%) and Quebec (14%). Most of their properties were built in the last ten years.

Primaris’s properties consist of enclosed shopping malls and are located in 20 markets within seven provinces. Ontario represents 42% of the REIT’s portfolio of which 20% is located in Toronto. Quebec makes up 14% of the portfolio, while British Columbia and the Prairie provinces respectively make up 15% and 28% of the portfolio. Primaris was spun out of the OMERS pension plan in 2003.

Crombie, the "Sobeys REIT", is 47% owned by Empire Co (Sobeys parent company). The portfolio is heavily weighted towards Atlantic Canada and Newfoundland (75%), with the remaining portfolio in Ontario (17%) and Quebec (8%). Sobeys occupies 33% of Crombie's GLA.

Remember, the best time to buy a REIT is when it is trading at a discount to Net Asset Value (NAV).

REIT Top Picks

Allied Properties REIT (AP.un)

"We believe that acquisitions growth will be an important factor in 2010 and make up for current weakness in fundamentals. REITs with strong balance sheets, access to capital on attractive terms relative to cap rates and a strong pipeline of opportunities will be able to deliver accretive acquisitions to drive earnings growth. All things considered our pick is Allied Properties REIT."

Jimmy Shan, National Bank Financial


Boardwalk REIT (BEI.un)

"Boardwalk is a high-quality REIT with a significant competitive advantage in Western Canada. It has a strong balance sheet, a conservative payout ratio, and management whose track record and alignment with unitholders is outstanding (management owns approximately $475-million of units)."

Michael Smith, Macquarie Securities


Canadian REIT (REF.un)

"High quality, diversified portfolio (both by geography and property type). Strong, conservative management team. Low AFFO [adjusted funds from operations] payout ratio. Low financial leverage. One of the longer track records of any REIT."

Neil Downey, RBC Dominion Securities

...

TFSA Time

My approach to my Tax Free Savings Account (TFSA) is very conservative. I want to shield my income from taxes while preserving my capital at the same time. I am taking a tortoise versus hare approach on this one. There are many options for income investors for your TFSA that go beyond high interest savings accounts and GICs.

Last year I purchased Canadian REIT (REF.un) and this year I will probably do the same. This is the most conservatively managed REIT in Canada. The current yield is 5%, but it should be noted that they have the lowest payout ratio in the sector, one of the strongest balance sheets and an excellent management team. When you buy Canadian REIT you get exposure to retail (50%), office (25%) and industrial (25%) properties across Canada.

This is the best REIT in Canada  -- Dennis Mitchell, portfolio manager, Sentry Select REIT Fund

Here are some other options for you to consider:
Boardwalk REIT: Owns a portfolio of apartment buildings concentrated in British Columbia, Alberta, Saskatchewan, Ontario and Quebec. Boardwalk currently yields 4.9%.

PH&N Dividend Income Fund: Well managed Dividend Fund with a very low MER.


Let me know what you are buying this year by commenting on this post.

Shaw Increases Dividend

Shaw Communications (SJR.B) increased its annual dividend to $0.88. This represents an increase of 5% or $0.04 per share. Shaw's dividends are paid on a monthly basis and this increase will commence March 30, 2010.

ATCO and CU Raise Payouts

ATCO Ltd. (ACO.X) declared a first quarter dividend of $0.265, representing a 6.0% increase over the $0.25 paid in each of the previous four quarters. The dividend is payable March 31, 2010, to shareholders of record on March 10, 2010.

Canadian Utilities Limited (CU), an ATCO company, declared a first quarter dividend of $0.3775, representing a 7.1% increase over the $0.3525 paid in each of the four previous quarters. The dividend is payable March 1, 2010, to shareholders of record on February 8, 2010.

Brookfield REIT

Possible Formation of a Premier Canadian Office REIT

Background: Brookfield Properties (BPO) owns 90% of publicaly traded BPO Properties (BPP), which in turn owns the majority of Brookfield's Canadian office properties. Most of BPO Properties real estate is located within downtown Toronto and Calgary. BPO Properties owns trophy office buildings such as First Canadian Place, Bay Adelaide Centre and the Exchange Tower.

BPP is structured as a taxable Real Estate Operating Company. This structure is losing its tax-efficiency and will likely be the catalyst for the restructuring of BPP into a Canadian REIT.

Possible Outcomes:

1) BPP could increase its current dividend of $0.40 (~2% yield) to a new distribution in the range of $0.80 to $1.00 (~4% to 5% yield). This would reflect the improved tax efficiency and it would be in-line with the typically higher-payout policy of a REIT. 

2) Brookfield Properties (BPO) could also sell its interest in Brookfield Place (a large office complex in downtown Toronto) to BPP. This asset is currently directly owned by BPO. Placing it within the REIT would consolidate all of Brookfield's Canadian real estate assets under BPP. This unlocking of value would provide Brookfield with additional cash to purchase distressed assets in the U.S.

3) Brookfield could potentially reduce its ownership stake in BPP from 90% currently to approximately 50% to raise additional funds. This would allow Brookfield to harvest capital from its mature, lower-growth Canadian operations for redeployment into other opportunities. This move would substantially increase the trading liquidity of BPP.

Should this occur, BPO Properties (a.k.a. Brookfield REIT) would become Canada’s pure-play, class “A” office REIT. The Canadian landscape has been largely void of such an entity since the privatization of O&Y REIT in 2005.

Innergex Power

Expect a Dividend Cut of $0.10 to $0.15 in 2011

Innergex Power Income Fund (IEF.un) is a renewable power producer that generates clean energy via hydro and wind. Innergex offers investors exposure to the Canadian clean energy sector and a stable income stream. Innergex owns interests in 10 hydroelectric power plants in Quebec (7), Ontario (1), British Columbia (1) and Idaho (1), as well as stakes in two wind farms in Quebec. Current power production is split 73% hydro and 27% wind.

Innergex is well positioned with long-life assets, low cost structures, long-term contracts and a strong track record of operational success. Innergex's 10 hydroelectric power plants have long-term power purchase agreements (PPAs) that average 15 years. The two wind farms have 20 year purchase agreements with Hydro-Quebec.

Innergex plans to continue as an income trust after Ottawa starts taxing trusts in 2011, but may have to cut its distribution by 10-15%. Even with a potential cut, the units are still attractively valued. Given its small size, Innergex remains a takeout target for a larger player in the renewable power space (Brookfield) or by a larger institutional investor, such as a large pension plan, looking for long-term stable cash flows.

 
Bottom Line: Innergex currently yields around 10% (87% payout ratio) and can be relied on as a source of stable income once its distribution is adjusted in 2011.

Health Care Stocks Outperform

Consistent Outperformance: David Rosenberg of Gluskin Sheff identified that U.S. health care stocks managed to do better than the broad market during 1980-89, 1990-99 and 2000-09. Health care stocks may not move quickly, but at least they move in the right direction.

 

Investors looking for broad U.S. Health Care exposure for their portfolio can invest in the SPDR Health Care Select Sector ETF (XLV).

For income investors, the sector contains several Dividend Aristocrats (25 years of consecutive dividend increases) such as Abbot Labs (ABT), Becton Dickinson (BDX), Eli Lilly (LLY) and Johnson & Johnson (JNJ).

The Preferred Solution

The Financial Post recently published an article on how rate-reset preferred shares are becoming increasingly popular and are proving to be an attractive alternative for income-starved investors once the income trust market fades into the sunset. After 5 years, the dividend yield on most of these "new" preferred shares resets to a new yield, say the 5 year Government of Canada bond yield plus a risk premium. This reset feature protects the investor from a scenario of rising interest rates. These new issues are proving quite difficult to get at the IPO. Most of the older issues are currently trading at significant premiums to their par value. Investors must also keep in mind that these preferred shares are not risk free investments.

"The virtue of preferred resets is that you can't get hurt too badly. You hold them to the first reset term and if interest rates have moved against you, your pain ends." -- David Baskin

Do We Chase?

Everyone is chasing yield these days. The "Junk Rally" ended in September and the "Quality Rally" is now underway. High Quality Dividend Stocks like Fortis and Enbridge were attractively priced up until August. Now both are near all-time highs. For now, both Fortis and Enbridge are on my watch list.

The question that we have to ask ourselves as rational/value investors is "Do we chase these stocks?" Are you content with a dividend yield under 4%?

A put writing strategy is a good idea, but given the high quality nature of these stocks, you won't be getting much of a premium in return. Judging by the prices that the put options are trading at tells us that there aren't too many investors anticipating a pullback in Fortis or Enbridge any time soon. Maybe things will get cheaper in April.

Fortis Increases Dividend

Fortis (FTS) increased its quarterly dividend by 7.7% to $0.28 from $0.26. Fortis extends its record of annual dividend increases to 37 consecutive years, the longest record of any public corporation in Canada. Fortis is the largest investor-owned utility in Canada.

Fort Chicago in 2011

Fort Chicago Energy Partners LP (FCE.un) has announced that it plans to convert to a dividend-paying corporation in the fourth quarter of 2010. Fort Chicago owns and operates energy infrastructure across North America. Its main asset is a 50% interest in the Canadian portion of the Alliance natural gas pipeline. Alliance is a 3,000 km pipeline that runs from Fort St. John, B.C., to Chicago (hence Fort Chicago's name). Enbridge Income Fund (ENF) owns the other 50% stake in the Canadian portion, while Enbridge Inc (ENB) owns the U.S. portion of the pipeline.

The trust believes that it can maintain its current $1.00 per unit distribution through 2010 and after its conversion. Upon conversion, the distribution will change to a dividend, and be eligible for the Canadian dividend tax credit.

Fort Chicago currently yields 10% and is still a Buy.

Zargon Energy Trust

Zargon Energy Trust (ZAR.un) produces oil and gas in Alberta, Manitoba, Saskatchewan and North Dakota. Zargon’s output is weighted 50/50 between oil and natural gas. This diversification gives Zargon a lower risk profile. Zargon is a small-cap energy trust (Market Cap ~ $450 million) and doesn’t get much attention from mainstream media and large institutional investors. Zargon has very little debt and continues to use its strong balance sheet to make acquisitions. It recently bought Masters Energy in April for $40 million.

Zargon plans to convert into a dividend-paying corporation with a policy to payout approximately 35% of its cash flow as dividends. Zargon is not expected to cut its dividend upon conversion due to its low current payout ratio.

Zargon currently yields 11% and is still a Buy.

CML Healthcare Downgraded

RBC Capital Markets downgraded CML Healthcare to Sector Perform (Hold) based on recent price appreciation and slightly lower return expectations. RBC's new price target for CML is $15.

CML Should Remain A Core Long-Term Holding. At the same time, investors should note that RBC views CML as a core long-term holding.

TD Dividend Growth Fund

Doug Warwick still likes the Canadian Banks
::: Michael Ryval ::: Morningstar Canada :::

A student of market trends, Doug Warwick expects that investment returns in 2010 will be in line with historic averages. "If you look at 200 years of history, a good long-term equity return is CPI  plus 3% or 4%," says Warwick, 52, lead manager of the $3.5-billion TD Dividend Growth Fund.

Indeed, 2008 was brutal as the fund lost 29.9%. Longer term, the fund has been in the first or second quartile and is a Morningstar Fund Analyst Pick.

"I never would have imagined that the mix of assets that we owned would go down that much. It was fear of financial collapse that did that," argues Warwick. "But the dividend income from our portfolios continued to creep up through all of this."

Why Trimark Likes Nestle

Invesco Trimark’s Investment Thesis for Nestle: Switzerland-based Nestle is the world’s largest food and beverage company with a strong portfolio of brands. It is positioned to benefit from increased consumption of nutrition, health and wellness products and a rising standard of living in developing countries. Throughout the entire economic crisis, Nestle continues to grow sales, earnings, cash flow, operating margins and dividends. It also maintains its plan to buyback 25 billion Swiss francs worth of its shares (approx. 15% to 20% of the company, depending on the share price) over the next three years. This is proving to be immensely accretive for long-term owners of the business given the current share price is significantly below intrinsic value. It is our opinion that the value accretion from the current share buybacks and the stability of its dividends are gifts that keep on giving and compounding for the indefinite future. It is this “compounding” nature of the economics of the business that benefits long-term shareholders on an after-tax basis.

Nestle is the largest holding in the flagship Trimark Fund representing approximately 10% of the overall portfolio.

Home Capital Group

Home Capital Group provides residential mortgages and credit cards to borrowers who do not meet the stricter criteria of the Canadian Banks. The borrowers include new Canadians and entrepreneurs with limited credit history. Home Capital is often dubbed as Canada’s subprime lender. Don’t be fooled. Home Capital has a stringent screening process as evident by the fact that bad loans amounted to only 1% of its total loan portfolio. Home Capital has the highest capital ratios in Canada compared to other publicly traded deposit taking financial institutions. Home Capital's ROE is above 25%.

Home Capital managed to increase its dividend 3 times in 2009. Home Capital has increased its dividend 12 times in the past 5 years. That's more than any other TSX listed stock according to FP Data Group. The 5 year compounded growth rate for the dividend is 40%. This will compensate you for the low current yield. Its payout ratio is below 20% which means that the dividend is safe and has room to grow. The stock is trading at a P/E of 10x which is lower than the Banks. The company is also very good at limiting loan losses.

A good entry point would be below $40.

Ritchie Bros Auctioneers

Susan Krashinsky wrote a good article about Ritchie Bros Auctioneers (RBA). The arctile highlights the company's defensive nature and stable business model.

Ritchie Bros. has turned auctions into big business. The Burnaby, B.C.-based company is by far the largest auctioneer of industrial equipment in the world, on track to manage $3.5-billion (U.S.) in equipment sales at its auction sites this year. And though the economy remains soft, Ritchie Bros. says it's a good time to expand, as the company takes its first steps in India, Japan and other areas.


"We grow well in good times, but we tend to grow faster when times are harder," says Ritchie Bros. CEO Peter Blake.

Ritchie Bros has a strong track record of dividend growth.

Stephenson's Income Portfolio

Ellen Roseman of the Toronto Star asked portfolio manager John Stephenson to put together a $50,000 portfolio for investors who want income to live on or reinvest. The theme for the portfolio is large-cap Canadian stocks that should benefit from Asia's rise in the coming decade. This defensive portfolio has a dividend yield of 4% and a 12-month target return of 9.4%.

Comments: With the exception of the energy stocks in this portfolio, it is hard to see how the majority of these companies will benefit from Asia's rise in the coming decade. Stephenson clearly favours oil stocks, but three names in the portfolio (Suncor, CNQ, Imperial Oil) hardly provide any yield at all. As far as diversification is concerned, the portfolio is only invested in four sectors. Kudos to Stephenson for putting together a concentrated, high-conviction portfolio that most investors can implement themselves.