Ryan Bushell, president and portfolio manager, Newhaven Asset Management

FOCUS: Canadian dividend stocks 

MARKET OUTLOOK:

As we expected, things turned sour for financial markets as September arrived. No market has been hurt worse than long-term government bond markets which were down more than 10 per cent in the most recent quarter and are sitting on annualized returns of nearly negative 10 per cent per year for the last four years. Frustratingly, the most recent move in long bond yields has hurt dividend stocks as much or more than other sectors that we feel are less sound fundamentally, creating opportunity for long-term investors.

We have held cash in anticipation of a move lower in all stocks and it appears we are beginning to see such a move. A host of macro factors keeps us cautious and holding cash for now, but we will be looking to deploy capital into this downturn, locking in dividend yields of six to nine per cent going forward. We continue to like utilities despite the move higher in rates, as they will eventually receive an upward adjustment in regulated rates of return as a result of higher bond yields. Richly valued technology stocks will receive no such adjustment to longer-dated cash flows that remain exposed to future competition and the economy at large.

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TOP PICKS: 

Fortis (FTS TSX)

Fortis recently raised its dividend for fifty straight years, a best-in-class track record for a Canadian public company. The shares are sitting near four-year lows due mostly to the move in rates we have seen in the past six weeks. This is a fantastic company that does not go on sale often and the future outlook remains bright driven by the demand for electricity which is expanding rapidly in their jurisdictions.

Algonquin Power (AQN TSX)

Simply put the move in Algonquin shares is overdone. This company is nearly two-thirds regulated utilities, including water utilities and the business simply is not that different from where it was in the past. Whether it sells the renewable energy business or not is inconsequential, the core business has more value than the share price indicates today.

TC Energy (TRP TSX)

TC Energy has a highly contracted business with stable counterparties in a favourable commodity price environment. Demand for natural gas is growing with over 10 BCF/D in new LNG projects past the Final Investment Decision (FID) phase and set to come on stream in the next decade. TC already moves nearly a quarter of all North American gas and nearly a third of North American LNG feed gas. With an 8.2 per cent yield at present, investors can lock in an attractive total return on the dividend alone with a high potential for share price appreciation over time as a free option.