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The Canadian Covenant

By Ari Charney on February 10, 2017

There’s a reason why so many U.S. investors like to own Canadian stocks. And it has nothing to do with Canadians’ most noble attributes, such as their perpetually apologetic politesse or their strategic maple syrup reserve.

No, we invest in Canada because as income investors we like to get paid. And Canadian companies understand the sanctity of the dividend far better than their peers in almost any country in the world.

One of my favorite quotes about this obligation comes from the longtime CEO of the Canadian real estate investment trust RioCan (TSX: REI-U, OTC: RIOCF).

In an interview with the Financial Post in 2013, RioCan CEO Edward Sonshine acknowledged that during the global financial crisis the firm was under-earning its distribution, and it was facing tremendous pressure to cut its payout.

But he made a deal with the board to maintain the payout and then review it again in two years if the company didn’t experience a turnaround.

Defending this action, he said, “I just felt a lot of people were relying on [the distribution]. I felt we have this covenant with those people.”

High and Rising Dividends

Not only do Canadian companies understand the sanctity of the dividend, they also know that income investors love high and rising payouts.

Even after the Canadian government’s so-called Halloween Massacre, which ended the wave of corporations converting to income trusts, a number of Canadian companies still offer payouts that are reminiscent of the income-trust era.

Even those companies that have a more conservative dividend policy have stocks that tend to yield far more than their U.S. peers.

For instance, the top-10 yielders in Canadian Edge’s Dividend Champions Portfolio currently yield an average of 5.1%. That’s more than 2.5 times the yield of the S&P 500 and 1.5 times the yield of the Dow Jones Utility Average.

And these 10 stocks aren’t just a bunch of high yielders on the verge of falling apart—several are considered core holdings for just about any income investor, while even the lesser-known names have fundamentally strong businesses.

The Analyst’s Analyst

Credit for stock selection goes to Canadian Edge’s Chief Investment Strategist Deon Vernooy, who has created a proprietary ranking system that underpins all his picks.

As managing editor of Canadian Edge, I work closely with Deon. Under his stewardship, subscribers are enjoying a level of analysis rarely seen among investment newsletters.

That’s because before Deon took the helm he enjoyed a long career in asset management. And for fun, he likes to teach budding analysts the chartered financial analyst (CFA) curriculum. So he’s what you might call an analyst’s analyst.

Despite being an incredibly sophisticated investor, Deon has the ability to distill his insights into actionable advice for the average investor. Well, I help a bit with that, too.

Accept No Substitutes

Naturally, some investors might wonder whether they can simply replicate the yield and performance of Canadian Edge’s Dividend Champions Portfolio with a mutual fund or exchange-traded fund (ETF).

Unfortunately, there’s a real dearth of funds for U.S. investors interested in Canadian stocks. And none of them do a decent job of mimicking Canadian Edge’s Dividend Champions Portfolio, particularly with regard to its focus on generating steady income.

Widely known offerings such as the actively managed Fidelity Canada Fund (FICDX) and the index-based iShares MSCI Canada ETF (NYSE: EWC) have low yields and have posted poor long-term returns compared to the main Canadian benchmark.

While these two funds hold some of the same stocks that Canadian Edge recommends, clearly their overall security selection, asset allocation, and timing haven’t translated into the same yield or performance.

For good measure, I reviewed a handful of other ETFs that specialize in Canada. Their performances were similarly disappointing.

It’s hard to find attractive yields in today’s market. But Canada offers one answer.

And it’s even harder to create a diversified portfolio of dependable, high-yielding dividend payers from a country that you may only know for its export of comedians. Here, Canadian Edge has the answer.


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